Q4 2022 Choice Properties Real Estate Investment Trust Earnings Call
Good morning, and welcome to the choice properties Real estate investment Trust fourth quarter 2022 earnings Conference call. Today's call is being recorded after the Speakers' remarks, there will be a question and answer session I would now like to hand, the conference over to your first speaker today, Aaron Johnson Vice President of.
Please go ahead.
Thank you.
Morning, and welcome to the choice properties Q4, 2022 conference calls.
I'm joined here. This morning by rail Diamonds, President and Chief Executive Officer, Mario verify the Chief Financial Officer, and antibiotic Chief operating officers.
I'll start the call by providing a brief recap of our 2022 performance and cover the highlights of the quarters.
And I will cover our operational results followed by Mario who will conclude our call with a review of our financial results before we open the lines for Q&A.
Before we begin today's call I would like to remind you that by discussing our financial and operating performance and then responding 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.
Circumstances performance or exceptions that are not historical facts.
These statements are based on our current estimates and assumptions and are subject to the 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 can impact our financial results and estimates and assumptions that were made in applying in making these statements can be found in our recently filed 2020 to annual financial statements and <unk>.
Management discussion and analysis, which are available on our website and on SEDAR and with that I'll turn the call over to Ralph.
Thank you Erin and good morning, everyone 2022 was another year of positive.
Positive momentum for our business as we significantly advanced our strategic agenda.
We remain focused on our goals, while preserving our capital generating stable and growing cash flow and achieving long term net asset value appreciation and distribution growth over time.
We delivered solid operating and financial results in 2022, driven by the strength of our grocery anchored and necessity based retail portfolio.
The realization of embedded rent growth in our well located generic industrial qualified out and our growing mixed use and residential platform.
In addition to our strong results, we further enhanced our portfolio by completing over one 2 billion in real estate transactions we.
We delivered three 8% NAV growth.
In 2022, driven by the strength of our industrial portfolio and progress on developments.
On the development front, we transferred $71 million from properties under development to income producing and achieved several key joining milestones in 2022.
We now have over 18 million square feet in our transformational development pipeline with significant near to medium term opportunities.
We took steps this year to ensure we maintained our industry leading balance sheet, despite pressures from rising inflation and rising interest rates.
With ongoing economic uncertainty, we remain focused on preserving liquidity and maintaining a balanced debt maturity ladder, both matches reduced risk and create financial flexibility.
This past year, we continued to lead the way in sustainability and made significant advancements in our two pillars.
Fighting climate change and advancing social equity, which you will hear more about next week at our Investor day.
We are proud of our ability over the last several years to maintain a stable distribution as we focused on improving the quality of our balance sheet and our portfolio.
Given the strength and stability of our business. We are pleased to announce choices first distribution increase since 2017 the.
The increase reflects the confidence we have enough business to continue to deliver steady and growing cash flows.
<unk> financial business, a strong financial position and the abilities of our talented and diverse team.
Turning to our fourth quarter activity, we delivered another strong clean quarter in terms of operations we have sustained.
Occupancy levels in our retail and industrial portfolios with occupancy at 97, 8%.
Our business delivered strong same asset cash NOI growth of three 9%.
During the quarter, we continued to execute on our capital recycling program, completing $120 million of transactions, including $75 million of acquisitions and $45 million of dispositions on the acquisitions front. We completed the purchase of approximately 90000 square foot loblaw anchored retail asset in downtown Toronto.
$53 3 million.
Completed the acquisition of approximately 22000 square foot shoppers drug Mart, and an established and growing node abroad in Ontario as part of the transaction, we entered into a new 15 year lease with chop as once again, highlighting the benefit of our strategic relationship with a major tenant.
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Subsequent to the fourth quarter, we completed the acquisition of three Standalone retail assets located in Western Canada from Loblaw for $98 6 million, while we plan to maintain a balanced capital recycling program. In 2023. This was an opportunity to acquire a strong performing stores that loblaw has committed to.
With new long term leases.
Executing on acquisition ranging from 15 to 20 years with an average 2% annual rent step of the lease term.
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 in Halifax, Nova Scotia for $40 million the same purchasing waves on the purchase of our last remaining Atlantic office building located in Dartmouth Nova Scotia.
With closing scheduled by the end of the first quarter of 2023.
To date, we have successfully disposed off or under contract to dispose off non of 11 non core office properties. We continue to closely monitor the market and we will sell our remaining two office assets.
The opportunities present themselves.
Progress on the development of the quarter was steady and we are on track to deliver.
Oh, two active residential developments and one 4 million square feet of industrial space in 2023.
With that I'm now going to pass the call onto Ana to discuss our operational results.
Thank you Ralph and good morning, everyone as Rob mentioned, we once again delivered strong operational results. We've remained near full occupancy ending the quarter at 97, 8% occupied an increase of 10 basis points compared to last quarter.
During the quarter, we had approximately 135 million square feet of lease Expiries.
Our renewed 114 million square feet at an average spread of 70% and we completed 242000 square feet of new leases that commenced in the quarter.
Resulting in positive absorption of 23000 square feet.
Turning to our asset classes occupancy in our approximately 44 million square foot necessity based retail portfolio continued to strengthen increasing 10 basis points.
97, 8% with positive absorption occurring in almost all major markets, demonstrating the strength and quality of our tenants and assets.
Demand for retail space remains high.
Although consumer disposable income spending is expected to continue to tighten in 2023 traffic volumes at our neighborhood sites remain constant.
With over 81% of our retail gross rent being generated from necessity based and value retailers, we expect our portfolio to continue to perform well.
As a reminder, we report rental spreads only on leases that expired and were renewed in the current quarter.
We had 507000 square feet of retail expiries in the quarter and completed 415000 square feet of renewals, resulting in tenant retention of 82%.
These wells were completed at rents six 4% above expiring.
We also completed a 131000 square feet of new leasing, resulting in positive absorption in the quarter.
Half of our new retail leasing came from discount pet food quick service restaurants, and personal service retailers.
As these categories continue their strong appetite for brick and mortar space, particularly in grocery anchored centers.
Given our national portfolio and Rachel knowledge, we continue to work with our tenants to expand their businesses.
Discount retailers continue to add add to their store network expanding to smaller markets of note. Our two new <unk> locations that opened in our centers and Selkirk, Manitoba and Alexandria, Ontario.
Turning to industrial market dynamics remain solid the national industrial availability rate in Q4 was one 6% with new supply providing little relief.
<unk> out of 10 Canadian markets continued to have availability rates at or below one 2%.
In Q4 of 2022.
Another new rental growth record was achieved with the average national net rental rate, reaching $13 71 set of 39% increase year over year.
Increases were seen in all markets with Montreal, Toronto, and the Waterloo region, leading the way with annual year over year increases of over 30%.
Occupancy in our industrial portfolio is 98, 9% we are close to fully occupied we had 757000 square feet of industrial leases expire in the quarter of which we renewed 646000 square feet of space.
Rents, 87% above expiring.
In Ontario, 273000 square feet of Expiries were renewed at rates of 157% above the expiring rent.
We have significant embedded rental rate growth in our industrial portfolio and continue to see leasing opportunities across our entire industrial portfolio at rents well above current in place rents.
Our current average in place industrial rent is $8 43 per square foot.
Our high quality portfolio is primarily leased to necessity based tenants excuse me and logistics providers, who are less sensitive to economic volatility and therefore provides stability to our overall portfolio.
We continue to experience positive leasing momentum across our portfolio and we are well positioned to handle our 2023 lease renewal exposure I'll 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 fourth quarter. Our results once again reflect our portfolio is stable and growing cash flows.
Our reported funds from operations for the fourth quarter was $174 1 million or $24 one per unit.
Apart from nonrecurring G&A expenses of approximately $1 4 million, primarily related to severance and project costs. It was a relatively clean quarter with no significant or unusual onetime items.
On a per unit diluted basis, our Q4 and full of $24 one.
As in line with the fourth quarter of 2021.
The year over year increases in same asset NOI rough set by higher borrowing cost and cash flow dilution from the light transaction and as a reminder, the foregone NOI from the sale of our office properties was only partially offset by distributions and interest income.
Occupancy increased slightly in the quarter and contributed to our strong same asset results.
Method cash NOI increased by $8 5 million or three 9% compared to the fourth quarter of 2021.
By asset class retail increased by $7 5 million or four 3%. The increase was primarily driven by higher rents on new leasing contractual rent steps and higher capital recoveries.
Excluding the reduction in bad debt expense of $1 2 million retail increased by $6 3 million or three 5%.
Industrial cash NOI increased by approximately 900000 or two 5%.
This increase was driven by high occupancy and so.
Different rent growth on renewals as mentioned by Anna <unk>.
Mixed use residential and other increased by approximately 140000 for one 9%.
Now turning to our balance sheet are high from a snap increased two 3% to $13 36 per unit, an increase of $220 million over last quarter.
Our NAV growth was driven by $207 million of fair value gains on our investment properties, partially offset by downward fair value adjustments on our investment in Allied properties units.
And if you recall, we were quiet and referenced the mark to market. This investment to its trading price as of December 31.
Does that I mentioned, the industrial market dynamics remained strong our fair value gains reflect the cash flow growth and changes in rent assumptions in our industrial portfolio and also to a lesser extent our retail portfolio.
Included in our full year nap is $442 million of gains on our investment properties.
Fair value change in our investment properties was driven by strong industrial fundamentals and the achievement of key milestones in our industrial and mixed use development programs.
This was partially offset by the fair value losses in our retail portfolio.
In the second quarter to reflect the impact of rising interest rates.
We continue to believe that our valuations appropriately reflect the current market, including the pressures at a higher capital cost environment is putting on real estate economics. We are now seeing external appraisals more inline with our internal values.
Turning to our debt maturities, we had minimal financing activity in the quarter and ended the year with $260 million drawn on our credit facility.
We closed the quarter with strong debt metrics and ample liquidity.
Our debt to EBITDA ratio was seven five times and we have approximately $1 2 billion available on our credit facility. This is further supported by approximately $12 3 billion of unencumbered properties.
We continue to focus on de risking the balance sheet and leveraging the various sources of funding available to us.
Looking to the fourth quarter, taking advantage of the long term leases on retail properties acquired from Loblaw, which we all referred to earlier.
We committed to $162 million of mortgage financings at tenders between 10 and 20 years.
The loans carry a weighted average term of over 13 years.
They've all been cost today of five 1%.
Looking ahead, we have 375 million of unsecured debentures maturing in the first quarter.
We remain encouraged by strong demand for our name in the unsecured market and are confident in our ability to refinance these maturities.
Touching briefly on our disclosures, we're committed to providing detailed and transparent disclosure and we're continuously reevaluating our disclosures to attributable price sufficient information to our key stakeholders.
As a result, we've made several disclosure improvements throat or annual report, including detailed tenant and lease maturity profile information on both retail and industrial segments.
So overall, our business model, our stable kind of base, our strong balance sheet and our disciplined approach to financial management.
<unk> well for future success and this has set the foundation for our first distribution increase since 2017.
One our financial goals just to continue to drive increases in that and distributions over time and this increase reflects our ability to deliver on the school.
Looking ahead, we are confident in our business ability to deliver in 2023, we expect stable occupancy across the portfolio, resulting in 2% to 3% year over year growth in same asset NOI on a cash basis.
Annual <unk> per unit dilutive in the range of 90% to 99 cents per unit, reflecting a 2% to 3% year over year growth and.
And stable leverage metrics.
And with that rail and Aaron and I will be glad to answer your questions.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Sam Damiani with TD Securities. Please go ahead.
Thanks, and good morning, everyone and congratulations on the good quarter and a distribution increase that's great to see.
Just wanted to maybe start off on the guidance, 2% to 3% same property.
Similar <unk> growth just wondering what the offsets you're anticipating in 2023 to two not a lot we have a full growth to grow a little faster.
Okay.
Hey, good morning.
Well it really right now we're just we're just cautious on interest rates.
Effectively.
We're seeing right now there's still volatility.
And what the rates will be projected to decline at the end of the year you are seeing that with inflation numbers and job numbers set that maybe thats. The case. So it's just we're just being cautious on interest rates.
But we're very very bullish on NOI.
We've got a lot of work in the last year to ensure that.
Some of the exposures that have had are gone and with the industrial now we're starting to roll up the rents there solid comp NOI are cautious on interest expense.
Okay that makes sense and on this on the same property guidance is there a is there a breakdown by retail and industrial that you'd be willing to share at this point or.
I guess directionally.
Industrial will be it will be much higher so, let's say like with the retail probably in the <unk>.
The twos, but industrial will be hired to bring that I understood closer to phase III.
And just last one for me.
The.
Good disclosure of bi that we break down the industrial and the retail.
Andy You mentioned the average in place rent of 843 on the industrial do you have happen to have an estimate of the overall average market rent for your portfolio.
Okay.
Okay.
Jim.
We think market to market.
About 40% embedded growth within our industrial portfolio.
Portfolio.
Okay.
Great that's helpful and I'll turn it back thank you.
Your next question will come from the line of <unk> <unk> with RBC capital markets. Please go ahead.
Thanks, Good morning, just on the on the properties that were acquired in the quarter.
And in January from Loblaw any color you can share just in terms of the cap rates or maybe even a range on those transactions.
And then also on the on the office disposition and Alf X.
Perfect. Thanks for the question.
We generally don't disclose cap rates.
The ones, we acquired in the quarter was call it mid fives.
Office at the moment, especially suburban office Israeli trading on a price per foot.
I don't know the exact cap rate I believe it was around a seven.
And then the step from Loblaw I don't have it handy right now.
Okay. We can maybe circle back on that just on the I think you mentioned, 2% rent rent average I guess annual rent escalator on loblaw properties that were acquired in January I think thats a bit better than your typical kind of one 5% is was that is that perhaps the expectation going for.
Or was there was this more of a unique.
Transaction.
Okay, I think it's all going to be dependent at the time, we are acquiring an asset and it's all done at market with loblaw.
And truthfully, it's all a function of the starting rent the cap rate the growth and that's fair to both sides. So it is higher than the existing portfolio, but again it was done at a different time to the existing profile. It was opioid and we do.
Expect.
Growth as we roll the lateral releases.
Got it.
Just maybe thinking about the industrial portfolio clearly there is.
Some attractive growth ahead, but it's still a small piece of the overall business over the long term is the intention to keep this in the REIT or would you consider potentially perhaps spinning it off it at some point down the road.
Yes.
When we think about industrial platform, we have roughly $3 $5 billion of income producing assets and we have this tremendous opportunity to grow it both through embedded rent steps, which and embedded rent growth, which Andrew referred to the first question and then secondly on our development pipeline.
Roughly 7 million square feet.
And we are going to focus on making the best strongest industrial platform that you can buy in the Canadian REIT landscape.
Within choice and then we will assess it at that time.
Okay.
Got it.
Maybe just last one just with respect to the Allied units whats Youre thinking about that investment is the the lockup period begins to open up over over the course of this year.
Okay spectacular.
Spectacular financial shape.
And in our minds is the best office operator in <unk>.
So.
We ended no pressure to sell the units we get a stable.
In fact, it grew last year distribution from Ballard and we'll sell the units over time when when it makes sense.
Okay.
Thanks, very much rail I'll turn it back thank you.
Okay.
Your next question will come from the line of <unk> <unk> with <unk> capital markets. Please go ahead.
Thank you and good morning, everyone.
Just on the office dispositions.
Can you discuss the depth of the buyer pool, and the appetite that you're seeing from potential buyers.
Yes, Thanks for your question.
We have remaining are generally smaller.
They generally considered non core assets the buyer profile is generally.
<unk>.
And it's not that deep at the moment.
Just given some of the pressures on the asset class, but as you've seen we've been very successful at executing.
The dispositions of the non core as we said on the call. We have two remaining and we will sell them when the top drive.
Okay and then.
My next question is when you're thinking about capital allocation in 2023.
Unfolds has the return profile changed between acquisitions development and the NCI will be when you're comparing it to 'twenty two.
Okay.
Yes.
Yeah.
In general.
Right now our focus is allocating more capital to development.
This opportunity.
With industrial.
It's growing.
We've been beating pro forma as we assess our modeling.
<unk>.
And basically.
Others, I think Kent cant develop anything to the yields we can for industrial so we.
We still continue with recycling that he is just prudent management and believe it to be more balanced as Ralph said, we were we were repositioning the portfolio with last years, but now we can maintain just with our capital recycling.
And allocate more capital to development.
Okay, Okay, great and just lastly on new and existing leases.
Can you just provide some more color on how you're thinking about rent escalators across different asset classes, given the persistent inflationary environment.
Yes.
Sure.
I'm pushing as much as we can with respect to our renewing tenants I think in industrial obviously that gives us.
Great runway to grow that grow.
Throughout the Radisson and Youll see sort of <unk>.
Strong rental rate growth there.
And again with with retail.
That space is also very strong, particularly in the neighborhood centers, where we have great demand.
Yes, there is very few new developments being built and that is helping us increase rents.
No.
You'll see rental rate growth in excess of what you've seen this year.
Okay great.
Thank you so much for the color I'll turn it back to the operator.
Okay.
Again, Brian a question simply press Star one on your telephone Keypad. Your next question will come from the line of Himanshu Gupta with Scotiabank. Please go ahead.
Thank you and good morning.
On the balance sheet, I think you have around $400 million.
Unsecured debentures coming due.
Do you have that sense of secured financing unsecured financing at this point.
Hi, good morning.
We're in a fortunate position that we have.
Access to all sources of capital, but I think we just demonstrated.
We just tapped into the secured market.
And took advantage of our long term leases and took advantage of these.
Thesis of lenders.
For term and sold.
At today's rates, probably about five 1%.
The answer to your market is open for US we're getting calls every day on demand I think our spreads are.
That's not the tightest one of the tightest in the industry and so we have access to multiple sources and we're going to be small.
Go ahead.
Securities are on fiber one.
Unsecured with good duty mid five or even higher.
It would be a bit higher but the gaps narrowing the securities are getting higher.
So so right now I'd say based on today, just top of my head, but five 4% probably for an unsecured.
<unk> five one for security.
I think you mentioned the important thing to note in the underlying bonds have have risen a bit.
Meera said the spreads have toxin on the unsecured.
And then also remember on unsecured we have a true 10 year mortgage is the amortization.
And as Mary said, we really are in a fortunate position given our credit rating to be able to access all forms.
All of that and go long on all forms and you mentioned the other factor in players.
The short term of the curve is very steep.
That facility is probably the most expensive source of debt right now so having long term leases being able to push out to longer terms is actually more beneficial and we were fortunate to be in that position as well.
Got it thanks, thanks for the color there.
And then just sticking to.
Another follow up on the distribution includes announcement. So do you have like a target which will be able to ensure in mind or is it more a reflection of how do you see for growth.
Going forward.
Yes.
Great question.
For background.
As we've said a few times, we've been right sizing the balance sheet improving portfolio of quality investing in growth opportunities and we felt we are in a position to start.
Sure in some of our growth with our investors as opposed to putting them back into the business.
And we also think that.
The payout ratio, however, which way you calculated our earnings are so resilient system improvements are in that.
Pandemic and.
You see it right now our ability to sort of interest rates and stuff like that so so we're focusing on as we grow sharing that so it'll be tried to maintain a consistent payout ratio and it's where we are today.
And just interesting so but no specific target stability launching our leverage metrics and share with you all.
Such risks.
Got it.
Central Bank rule.
And then just shifting gears on the industrial portfolio clearly lot of mark to market opportunities.
Opportunity there.
And it looks like you're expecting something closer to 3% same store NOI growth this year.
Where do you see this would further activity in the coming years as more of these expiries coming do come due especially in Ontario region.
I can jump in I mean, yes, I mean like.
The retail.
If we were talking a year ago to see our retail so between one and a half into.
And steps are getting a bit higher but it is stable and youre right. The next three or four years has been get access to the.
Industrial portfolio, especially with GTA.
We should be at the high end of that range Thats, how we get to that.
The two to three range as the industrial World.
Complement.
Yes, the retail.
But to Mary's point, you mentioned industrial is definitely higher than 3%.
That you quoted.
Yes.
Thank you. Thank you, Rob and thank you Mario and I will come back.
Thank you we have no further questions at this time I will turn the conference back over to management for any closing remarks.
Thank you Regina.
To summarize we're very pleased with our fourth quarter.
22 operating performance, we are truly in a position of strength highlighted by industry, leading balance sheet and supported by a distribution increase.
We look forward to sharing more with you next week at our Investor Day on February 23rd at one PM and information to join the webcast can be found on our website. Thank you for your interest your investment in choice and for joining US This morning.
Ladies and gentlemen that will conclude today's meeting. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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