Q4 2022 CT Real Estate Investment Trust Earnings Call
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This conference is being recorded sets cold for homes that don't Hershey's Te.
All participants please standby your conference is ready to begin.
Good morning, My name is Valerie and I will be your conference operator today.
At this time I would like to welcome everyone to see T reached Q4, 2022 earnings results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
To withdraw your question Press Star then the number two.
The speakers on the call today are Kevin Salzburg, President and Chief Executive Officer of Citi, REIT, Jodi Spiegel Senior Vice President real estate of Citi Reed, unless we get fan Chief Financial Officer P. T REIT.
Today's discussion may include forward looking statements.
Such statements are based on management's assumptions and beliefs.
These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.
C C C T reached public filings for a discussion of these risk factors, which are included in their 2022 MD&A in 2020 two a I F, which can be found on city reached website and on SEDAR.
I will now turn the call over to Kevin sell Spirit's, President and Chief Executive Officer extra T right Kevin.
Thank you Valerie and good morning, everyone.
We're very pleased to welcome you to <unk> fourth quarter 2022 Investor Conference call.
2022 was a successful year for <unk>.
Marked with many accomplishments and milestones.
I'm very proud of the work and strong results delivered by our exceptional team, especially when considering the dynamic economic environment that we are currently operating within.
Through the course of the last year, we were active on the growth front acquiring seven properties and completing the development of 19 new projects.
We deployed approximately $260 million.
<unk>, an ongoing acquisition and development activity and added nearly 1 million square feet of GLA to the portfolio.
We were also very pleased to announce and start the construction of our new net zero distribution center in Calgary that will be completed later this year.
Operationally the risk portfolio remains in sound shape.
Our occupancy rate has ended the last three years above 99%.
And the work that the team has done proactively managing our lease Expiries has allowed us to maintain our weighted average lease term of eight six years for the portfolio. The same number that we ended 2021 and one of the longest in the sector.
From a capital markets perspective, we started the year off by raising $250 million through an unsecured debenture issuance in advance of interest rates starting their steep climb and we ended the year by announcing the establishment of the reach normal course issuer bid.
We were also proud to announce our ninth distribution increase since going public in 2013.
We made great strides on the ESG front launching property and corporate level initiatives issuing our inaugural ESG report and obtaining our first public grasp the score.
As we look to the future we are fortunate to have great pipeline of projects.
Our unique relationship with Canadian tire continues to provide insights into real estate markets across Canada, and new opportunities for growth as they continue to invest in their retail and supply chain networks.
Additionally, we continue to look within our collective portfolios for longer term opportunities at certain of our urban assets.
Similar to the application filed on Canadian tire owned property located at young and Davenport last quarter.
On behalf of Canadian Tire has now submitted our rezoning application for their property located at main and Dan for it.
As I mentioned on our last conference call. While this is only the first step in a long process. We are excited by the possibilities that this activity allows for.
Namely the potential for CTC to surface value from their asset.
An opportunity to deliver improved store experience in the future to their customers and the possibility for <unk> to potentially participate in the project.
The REIT is also in the early stages of investigating properties within its own portfolio that may be suitable for higher and better uses and the feasibility of submitting some similar municipal applications in order to create further optionality and to potentially surface incremental value from our assets.
We are also extremely pleased with the progress that Oxford properties continues to make with respect to the future redevelopment of Canada square located at Yonge and Eglinton in Toronto.
Prior to year end, Oxford submitted an updated master plan scheme for the project, which incorporates the feedback from the extensive community consultation process that has taken place over the last two years.
This updated plan incorporates improvements to the public realm, including a significantly larger parks space provides additional amenity and community space leverages existing infrastructure and buildings to reduce the environmental impacts of the project.
All while maintaining the same amount of density on site.
To remind our listeners this multi phase development project contemplates nearly 3 million square feet of density approximately two thirds of which is planned for residential uses.
Clearly there is a lot to be optimistic about here at <unk>, including our results for this most recent quarter that Leslie will discuss with you shortly.
Our stable and resilient net lease portfolio continues to perform well and is largely insulated from the impacts of escalating costs on operating margins, a strong balance sheet and minimal near term debt Expiries helped to insulate us from the current interest rate environment.
Our development pipeline will drive further growth over the near to midterm and are murky longer term projects have the potential to surface incremental value with aren't within our asset base and to deliver opportunities for C. T read through our privileged relationship with Canadian tire.
And with that I will turn it over to Jodi and Leslie to walk you through an overview of our investment leasing and development activities as well as our financial results Jodi.
Thanks, Kevin and good morning, everyone as highlighted in our press release yesterday, we were pleased to announce four new Canadian tire store expansion projects this quarter totaling $31 million.
Once completed these intensification will add an incremental 109000 square feet of GLA to the portfolio at a weighted average cap rate of six point, 11%. These four new investments are examples of low risk development opportunities that leverage our existing land base improve our ASP.
And contribute to the growing pipeline that Kevin just referenced in.
In the fourth quarter, we completed eight projects totaling $73 million and added 200, and not 291000 square feet of incremental GLA to the portfolio.
These included the development of a new Canadian tire store and Blake, Mr. Alberta, as well as the expansion of four existing Canadian tire stores in Welland, Ontario, Charlottetown, Prince Edward Island, <unk>, Quebec and in the play in Quebec.
In addition, we completed three pad developments at our existing properties, and Alison, Ontario, Halifax, Nova Scotia, and St. Paul Alberta.
At the end of the fourth quarter <unk> had 26 properties that rent various stages of development with 11 projects currently expected to be completed by the end of 2023.
The projects in our development pipeline represent a total committed investment of approximately $375 million upon completion $130 million of which has already been spent and $127 million of which we anticipate will be spent in the next 12 months.
Upon completion these projects will add a total incremental gross leasable area of nearly one 3 million square feet to the portfolio 99, 5% of which has been pre leased at quarter end.
Over the course of the year, we completed 31 lease extensions with Canadian tire 12 of which were in the fourth quarter, including the lease extension for Canadian tires head office at Canada Square in Toronto.
In addition, we also completed approximately 200000 square feet of lease renewals with our non Canadian tire tenants in 2020 to achieving an annual and average renewal spread of approximately 10% for the year.
At $8 six years, the weighted average lease term for our portfolio is one of the longest in the sector and the portfolio remains 99, 3% occupied in line with last quarter and with that I will turn it over to Leslie to discuss our financial results Leslie Thanks, Jodi and good morning, everyone.
As Kevin highlighted we were very pleased with the results delivered by the REIT this quarter to close out a strong year.
<unk> per unit on a diluted basis was up a healthy six 2% in the quarter to $29 <unk>, which was primarily driven by growth in net operating income partially offset by higher net financing costs.
On a full year basis diluted <unk> per unit increased to $1 $14 seven representing growth of three 9% versus 2021.
Diluted <unk> per unit in the quarter was 32.2 cents up four 5% compared to 38 cents in the Q4 of 2021 for the full year diluted <unk> per unit was up two 1% to $1 $26 four.
Net operating income was $106 8 million for the quarter, an increase of five 8% or $5 8 million compared to Q4 of 2021.
Same store NOI for the kroner grew by $2 6 million or two 6% as a result of contractual annual rent escalations contributing $1 4 million, including the one 5% average annual rent Escalations included in the Canadian tire leases.
But the balance of the growth primarily from the continued recovery of capital expenditures and interest earned on the Unrecovered balance, which contributed approximately $1 million to NOI in the quarter.
Same property NOI for the quarter grew by $4 6 million or four 7% as a result of an increase in NOI of $2 million from the intensification completed in June 2022, and 2021. In addition to the same store NOI growth.
On a full year basis, NOI increased to $419 8 million representing growth of four 7% versus 2021.
As highlighted in our call last quarter, our Kenneth square property is being managed in contemplation of its eventual redevelopment, Oxford has begun the process of marketing the newly available space at 21 80 Young Street as discussed last quarter. This vacancy is expected to negatively impact NOI in 2023.
Excluding fair value adjustments G&A expense as a percentage of property revenue was two 8% for the fourth quarter, which was in line with the same period in prior year up two 9% and was two 9% for the full year, a slight increase from the two 6% in 2021 due to the increased personnel costs, including Seo CEO Trans.
<unk> costs earlier this year.
The REIT recorded a small investment property fair value decrease of approximately $900000 for the fourth quarter of 2022.
Mainly driven by increases in Investor investment metrics for certain REIT properties located in secondary and tertiary markets largely offset by cash flow growth from the core portfolio tenancy renewals and the development completions during the quarter.
The discount in terminal cap rates for our retail assets increased by two basis points, each and the average rates used for industrial assets remained flat for the quarter.
Distributions in the quarter grew three 3% over the same period last year to 21 seven.
<unk> and an <unk> payout ratio of 74, 3%.
For the full year distance distributions were up four 1% over 2021, taking the <unk> payout ratio to 74, 5%.
Now turning to the balance sheet, our debt metrics debt metrics.
Metrics continue to remain strong with interest coverage ratio at 372 times in Q4 2022.
Which was stable for the fourth quarter of 2021 for the full year interest coverage ratio was 367 times ever so slightly down from 372 times in 2021.
Teachey recent Dennis ratio of 47% was broadly in line with last quarter and down compared to 41, 2% at the end of 2021 the.
The decrease in the ratio compared to 2021 was primarily due to the reached 20 282 acquisition intensification and development activities as well as growth from the fair value adjustments made to the Reits properties exceeding the great exceeding the growth of total indebtedness.
At the current interest rate environment remains elevated as Kevin noted in his introductory remarks, we are pleased to be presently insulated from refinancing risk as we have no significant debt maturities scheduled to mature in 2024 and no public unsecured debentures coming due until 2025.
Our liquidity remains strong with $195 million available through our committed credit facility and a further 300 million available on our uncommitted facility with Canadian Tire Corporation.
And with that I will turn back to the operator for any questions.
Thank you.
Please press star one at this time, if you have a question we ask that you limit yourself to one question plus one follow up question.
There will be brief pause while the participants register for questions. Thank you for your patience.
Okay.
Our first question is from Sam Damiani with TD Securities. Please go ahead.
Thanks, and good morning, everyone and congratulations on a.
Your finish to the year.
Thanks, Dan.
Just wanted to maybe start off on the same store and same property NOI growth, which was quite strong in the quarter and just generally has been trending.
We are little bit higher over the last little while and if we look back over time it is.
Not a noticeably higher piece.
Then a few years ago adjusting for occupancy changes. So just wondering is this kind of new rate sustainable or was there anything unusual driving same store NOI growth in 2022 that may not continue going forward.
Santos Leslie.
So I think we've had a strong year with development completions intensification of all generating the incremental NOI I think the other thing that we briefly mentioned as you know, we we had stronger tailwind with regard to the increase in the rate of inflation.
And you know, we do recover the sort of unamortized balance of sort of that sort of deferred capital the roofing and sort of parking lot works that type of stuff and are able to charge them at about prime plus 2% on that so with the with the run up of rates throughout 2022, and that has definitely increase that component of the NOI.
Growth.
And obviously with the sort of gradual or are they sort of perhaps not graduate run up through 2022, when we look through 2023 actually there there's more there as we comp over rates from Q1, and Q2 last year that will are anticipated to be at higher rates. So.
You know that that interest recovery will actually drive some of that NOI.
And the restaurant is is really quite solid I mean, if we think about the you know the one 5% coming from Canadian tire leases the other.
Higher growth coming from the renewals of these CRE you leases that Jodi spoke to all of those things factor into a continued steady growth.
So if prime.
Falls back down to 300 basis points over the next couple of years would that be a headwind for same store NOI growth at that time.
It could be a better although I don't think that two or 300 basis points is what I'm seeing coming in the near term with banks in their forecasts are online.
Okay, and if I may just my follow up then is just on the bed Bath and beyond.
Further no you guys just have one location, but I wanted to just clarify and what your thoughts are on the.
Prospect of back filling that.
Hi, Sam it's Jodi.
We do have just the one location as you noted in a center and Collingwood, which has always performed very well and we are getting a lot of strong demand for backfill tenants. So you're right. When you believe we're in a very good position there and also the spaces under 20000 square feet. So we don't anticipate any issues on releasing.
Before I turn it back thank you.
Thanks.
Thank you once again, please press star one at this time, if you have a question.
Our next question is from he mentioned Gupta with Scotiabank. Please go ahead.
Thank you and good morning.
So just on the leasing on the Canadian tire squeeze that office property at 20, <unk> Street or any of the deal.
And we understand the impact it was one 8 million I think for the full year. So it wasn't any impact in Q4, which was affected in two folds.
Can the entire lease expired December 31, so the vacancy is at Jan one.
In terms of next steps and releasing its.
It's about 90000 square feet ox.
Oxford is our.
Property and asset manager here. So they are running point on our re leasing efforts and they are just.
Really launching.
That whole process.
So no specific update.
Were working.
Working on finding tenants for office space in Midtown Toronto.
Our expectations around that are fairly conservative in that.
We think it will take a little bit of time to find the right tenant there were a couple of floors that were given back so.
We'll likely be released to multiple tenants.
So our assumption for this year is basically no no rent until 2024.
Awesome. Thank you for that and maybe just a follow up.
You know the similar question regarding Canada Squeal again, there will.
There'll be some NOI impact for the CEO .
You guys had mentioned 300 million anything reflected in Q4.
And also in the room, if I look at 2024 and beyond.
That impact and further increase from there.
And just lastly for the for that we'd noted I'm really minimal impacts a little bit perhaps at the end of 2022 really flowing more significantly into 2023.
And again a lot of that space is in the building that was sort of at the southwest corner of young and exits in the 'twenty 200 young building.
That is part of our phase one development. So you know I'm I'm not expecting that we will see more necessarily positive momentum on that obviously as we head towards the development that building as part of it and so.
We'll be sort of vacating that building up with all the tenants as we get to the beginning of the construction. So I'm not expecting really to do any more perhaps active leasing in that building.
Got it thank you that's it.
For myself.
Thank you.
Our next question is from <unk> <unk> with RBC capital markets. Please go ahead.
Thanks, Good morning, just coming back to your comments on servicing value in your portfolio.
Canadian tire I'm.
I'm just curious how many properties are you currently looking at and how many rezoning applications. Do you think you may file in the next 12 months or one to two years.
Yeah, Amit, it's Kevin like I said these efforts are.
At their preliminary stages. So I think right now we're in the feasibility stage in determining which properties may be appropriate.
We have approximately half of our portfolio and Victoria markets that doesn't mean, we have 50% of our portfolio thats suitable for higher and better uses but certainly within Toronto, and Vancouver, and Montreal, especially there are a number of urban sites that are on.
On transit corridors.
I don't think we have anything specific in terms of guidance on the number of applications for this year or beyond I think right now we're just.
Starting to work with our consultants and looking into official plans and zoning.
Optionality to remind you each of these locations does have a Canadian tire store in place with a long term lease with options. So.
We do.
We will be in collaboration with Canadian tire in terms of the feasibility of actually creating that value. Once entitlements may be received so I think this is a longer term.
<unk> for us longer term project. It's just one we wanted to highlight that we are starting to think our way through and again today. The REIT does not have.
Residential development program our strategy.
It's more.
Creating value through entitlements, we view as a low risk.
Prospect.
<unk>.
Yes that really delivers optionality for us in the future and what we decided to do with that Optionality remains to be seen.
Alright, so it sounds like.
Certainly you can create value through the rezoning process, but not necessarily you may or may not participate in the actual.
Development of some of these problems.
Yes, it remains to be seen I mean, we have a lot of work to do from here to there. So I think as we.
Go through the development application process part of that will be some investigations on scenario planning and financial analysis and risk and in discussions with both Canadian tire in our board.
Just around the appetite to do so but as of right now I would say it's more.
Let's take a step one and then reevaluate before we get any further steps in the future.
Okay got it just last one.
I think I think Jodi you mentioned.
<unk> tire head office lease extension.
What was the term of that extension and any change in the economics.
In terms of the REIT.
Sure, Let's say, it's a it was a for a term of 30 months here as we approach the sort of development. So that'll take us out to two and a half years.
And there were contractual amounts in that lease. So you know it was it was the market rate for the area, but they'll be here for another two and a half years as we progress towards the development.
Thanks, very much I'll turn it back.
Thank you.
Thank you.
Once again, please press star one at this time, if you have a question.
There are no further questions registered at this time I would like to turn the meeting back over to you Kevin.
Thank you Valerie and thank you all for joining US. This morning, we look forward to speaking to you again in May after we release, our Q1 results and welcome you to our AGM at that time. Thank you very much.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Okay.
The conference has now ended please disconnect your lines at this time and we thank you for your <unk>.
Dissipation.