Q2 2023 CT Real Estate Investment Trust Earnings Call
Being recorded so it goes to the homes that don't have as you see.
Good morning.
My name is Paul and I will be your conference operator today.
At this time I would like to welcome everyone to CPU reached Q2, 'twenty two 'twenty three 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.
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 CPU, right Jodi Spiegel Senior Vice President real estate, and Leslie Gibson Chief Financial Officer.
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.
Please.
If you read the public filings for a discussion of these risk factors, which are included in their 2022, MD&A and 'twenty to 'twenty two.
I F, which can be found on <unk> website and on SEDAR.
I will now turn the call over to Kevin Salzburg, President and Chief Executive Officer of C. T right.
Kevin.
Thank you Paul Good morning, everyone and welcome to <unk> second quarter Investor Conference call.
Building on the strength of our Q1 results I am very pleased with the accomplishments of our team in the second quarter.
Increasingly uncertain macroeconomic climate, our continued focus on providing our unitholders with a consistent stable and growing investment option continues to bear fruit.
Q2, we successfully extended leases representing nearly four 5% of our portfolio, thereby maintaining our weighted average lease term at eight six years, one of the longest in the sector.
We made solid progress on our developments completing nearly 200000 square feet of new projects, which has now brought our total portfolio gross leasable area to over 30 million square feet.
We also added over 50000 square feet of new development projects to the pipeline.
We continue to benefit from the rollout of Canadian tire is better connected strategy and are fortunate to have a great opportunities to support our largest tenant and majority of unitholders bricks and mortar real estate related requirements.
The impactful combination of our successful project completions through the course of 2022, and thus far in 2023 as well as the organic growth drivers within our existing portfolio that have contributed to strong same store and same property NOI expansion during that time.
Led to meaningful growth in earnings and net asset value on a per unit basis.
And we have done this all while reducing our payout ratio by over 3% on a year over year basis, and bringing our leverage ratio below 40%.
As we approach <unk>, 10th anniversary I am delighted with how far we have come since our IPO in 2013.
Our portfolio has grown as has our team of dedicated professionals and the capabilities. We now possess as an organization.
And we have established a truly remarkable track record with respect to driving cash flow per unit growth in service of annual distribution increases while at the same time, improving our balance sheet and financial metrics in order to become one of Canada's most reliable real estate investment trusts.
See if you read is well positioned to withstand the current volatile environment and to continue to deliver on its purpose of providing investors with reliable durable and growing results over time.
Jodi will now walk you through an overview of our investment leasing and development activities and then Leslie will speak to our financial results Jody.
Kevin and good morning, everyone.
As highlighted in our press release yesterday, we were pleased to announce three new investments this quarter totaling $22.4 million. Once completed these projects will add an incremental 53000 square feet of GLA to the portfolio at a weighted average cap rate of 6.63%.
New investments include the intensification of three existing Canadian tire stores located in Port Hawkesbury, Nova Scotia Bar heap at Ontario, and Peterborough, Ontario.
We also completed four projects in the quarter totaling $54 million, which added an additional 187000 square feet of GLA to the portfolio.
These included the development of a new Canadian tire start in Sherbrooke, Quebec, as well as intense vacations of existing Canadian tire stores and castle in Ontario, and Chambly and dry Mcgill both located in Quebec at the end of the quarter. So if you read had 26 properties that are at various stages of development with seven projects.
Currently expected to be completed by the end of 2020 three.
These development projects represent a total committed investment at approximately 372 million. Upon completion 135 million of which has already been spent and 96 million of which we anticipate will be spent in the next 12 months.
Once built these projects will add a total incremental gross leasable area of just over 1.1 million square feet to the portfolio, 99.4% of which has been pre leased at quarter ends.
As Kevin mentioned, we were also pleased with our renewal activity in the quarter, which included the completion of 23 Canadian stock Canadian tire store lease extensions.
Lease extensions for all but one Canadian tire store with 'twenty 'twenty four expiry dates have now been finalized in total leases representing over one 3 million square feet of gross leasable area were extended in the quarter, which helped to maintain our weighted average lease term at eight six years one of the longest in this.
Sector.
Finally, our portfolio remains 99% occupied inline with last quarter with that I will turn it over to Leslie to discuss our financial results Lastly.
Thanks, Jody and good morning, everyone.
As Kevin highlighted we were very pleased with the solid results delivered by the right REIT again this quarter.
F O per unit on a diluted basis was up.
A strong 7.0% she's 30.4 cents compared to Q2 of 2022 they see.
Increase was primarily driven by growth in the same property net operating income as well as the positive impacts of the intensification is completed in 2022 and 'twenty twenty-three.
Partially offsetting this increase.
She was our interest costs on our credit facilities due to the higher interest rate environment. We're in.
Diluted <unk> per unit in the quarter was also strong for the same reasons coming in at 33.0 cents up five 4% compared to 31.3 cents in Q2 of 2022.
Same store NOI grew by $3 6 million or three 5% as a result of contractual annual rent escalations contributing $1.3 million, primarily being 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 2.4 million to NOI this quarter.
If you recall the prime rates that drive our interests are crappy, whereas low is two 7% at the beginning of Q2 2022.
Up to 3.7% by the end of Q2 last year as compared to Q2 2023 for prime rates were just under 7% for the quarter effectively a doubling of rates that we're comping over.
In addition, same property NOI for the quarter contribute a further $2 4 million in NOI. The intensification is completed in 'twenty two into 2020 three.
These all contributed to a quarter over quarter gross and net operating income of $6 million or very healthy five 8%.
Excluding fair value adjustments G&A expense as a percent of property revenue was three 1% in the second quarter, which is unchanged from the same period in the prior year.
Yeah.
The fair value increase of approximately 31 5 million was mainly driven by changes to the growth in the underlying cash flows from completed developments and intensification.
As well as lease renewals within our portfolio, which include the renewal of the 23 Canadian tire store leases as Jodi mentioned <unk>.
Consistent with our valuation methodology, we had 24 properties externally appraised this quarter spanning geographies across the country, which are reflective of our portfolio.
As a result of the appraisal information and other market data there was little movement and of our best spent metrics with the overall terminal cap rate for our portfolio increased two basis points and the overall discount rate by one basis point compared to the prior quarter.
Despite the challenging transaction market limited comparable sales and a continued higher borrowing environment demand and pricing for necessity based retail like our portfolio remains strong.
Distributions in the quarter grew 2.2% over the same period of last year to 21, seven cents, resulting in F O payout ratio of 71, 4%.
Thanks, Youssef treat my 2% over the same period last year, driven by strong F F O per unit growth.
Also in Q2, 2023 we repurchased units to our NCI D facility that was put in place towards the end of last year. So no large quantum we repurchased approximately $1.4 million every units at an average price of $14.45 in the quarter.
Now turning to our balance sheet, our debt metrics continue to remain strong with no significant changes from prior quarter. The interest coverage at 3.74 times was improved from the second quarter of 2022.
The indebtedness to EBIT fair value ratio was $6. Three 6.63 times also an improvement from Q2 2022.
C. T V's indebtedness ratio was 39, 9% was down from the same quarter last year, which marks the first time or leverages dip below 40%.
Although this ratio currency currently sits slightly below our target range, given the macroeconomic backdrop and interest rate environment. We continue to be pleased with the progress we have made to continuously improve our balance sheet and run our business with financial Prudence.
We're also pleased to be well insulated from refinancing risks as we have no debt scheduled to mature in 2024 and now public.
Unsecured debentures coming due until 2025, our liquidity remains strong with $152 million available through our committed credit facility and a further $300 million available through our uncommitted facility with Canadian Tire Corporation.
And with that I'll turn the call back to the operator poll for any questions.
Thank you.
Yeah.
At this time I would like to remind everyone in order to ask a question.
Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
The first question is from Jeremy Bahl from BMO capital markets. Please go ahead. Your line is open.
Thank you good morning, everyone.
Good morning, gentlemen, welcome back. Thank you I wanted to dig a little bit into the lease renewals. Congrats on the volume that was completed.
Let us know if the contractual rent steps are similar to what you've seen in the past the one 5% annually and then.
Secondarily I want to ask if there's any ability to insert some sort of inflation of protection in a rent steps are new leases that you're signing.
Good morning, Jenny it's Jody so I can.
Answer your question for you. So this quarter and approximately 90% of the renewals war are the Canadian tire stores. Most of those were our typical escalations, but we did achieve some higher ones out to your point in this inflationary market in our urban markets. So we did a we are starting to see some increases in some of it in some select.
Urban markets due to inflation for the other 10% of the renewals. This quarter are the non Canadian tire stores. We were quite pleased with our results to you are getting north of a 10% spread also reflecting the inflationary times.
In terms of the inflation protection journey, that's not something that we're contemplating at this time.
Okay.
And then in terms of the S. T NOI this quarter.
Pretty strong I think Leslie you touched on the interest rate doubling being a contributor to that is that the main driver of it being up year over year or is there a greater volume of the recoveries themselves, that's driving that number and how should we think about this.
Contributing going forward.
Sure Denny definitely interest rate was a contributing factor also during Q2, when we completed the final billings for 2020 to you to there was that a contribution of sort of just north of $1 billion that related to and recovery of our capital.
Capital and interest that was related to 2022, so I'm a little bit of of revenue there that will not be recurring.
And so that'll that will maybe mute things I. If you just compare Q2 to other ones. So you know our our same store NOI you know does go up and down a little bit depending on when we suddenly find development completions. So if you look back to Q3 or Q4 of 2022. They were also quite strong because we had you know.
<unk> developments come online. So there is a bit of variability in that in that number quarter over quarter, but that would probably the other.
Contributing factors so it's.
2022 piece to change in interest rate and just also the continued growth in the capital pool to be continue to amortize as we spend more money on our portfolio that deferred balance where we're coming from tenants has also been increasing them. So that would probably the other contributing factor that that does continue each quarter.
Great. That's helpful. That's all for me. Thank you.
Thanks.
Okay.
Thank you.
The next question is from Paul Me Beer, Bert sorry from RBC capital markets. Please go ahead. Your line is open.
Good good morning.
Just maybe I wanted to come back to the renewals for a second the 1 million square feet. It wasn't entirely clear to me in terms of.
The answer there, but what if we had to sort of simplify it what sort of lift did you get on those renewals.
So call me what I think he was trying to say is there was about one 3 million square feet renewed in the quarter.
Not all of that was the 23 Canadian tire store lease extension. So if you look at the breakdown is about 90% contributing from the ctr stores and in the balance of 10% being third party tenancies.
The third party tenancies, we don't have the same rent features as the Canadian tire store leases with the annual bumps. So the the spreads we were able to achieve on I would say on.
Average five year renewals was.
10%.
Within the Canadian tire store bucket of lease extensions, we did get the continued annual rent growth.
Which on average.
Does approximate the portfolio, but in urban markets, we were able to push the envelope higher than the average.
Which is I think a benefit to us.
I think in terms of the composition of the 23 stores. It was more highly skewed to small market and large market, but that's just timing.
Issue I guess in various quarters of various years that composition and mix changes.
So.
We did get.
Describe it as on average one 5%, but there was a focus on on driving that annual escalation higher in those markets, where we're seeing higher inflation.
Yeah.
Right I guess the.
The one 5% as the annual escalator that sort of continues on the renewals I was just thinking on the actual year one renewal.
Yes.
We believe there is a floor and there is a cap at 12%.
That's sort of I was looking at is the year one renewal spread.
Yeah I think.
Jonathan.
Yeah. So.
So is it so I think the comment I would make is.
On average, we actually feel that the portfolio for the entire releases is at market. So okay, but for the small exception here or there, which does happen from time to time generally we don't see a specific lift related to year one of the extension period.
It's more a continuation of the annual increase was overtime. Okay. That's what I want to clarify thank you for that.
And then just maybe looking at the development pipeline.
It does look like a number of projects were pushed into 2025 can.
Can you just comment on maybe some of the drivers there and I'm curious if you're starting to see cost start to stabilize.
I'll take the second part of that question first I think the short answer is yes, we are seeing cost stabilized I would say we are seeing them stabilize at an elevated level things are still very expensive.
And I think part of what's driving that is the fact that it's taking longer so.
Those development completion dates that got pushed out.
Whether it be municipal applications that are taking longer.
The lack of availability of skilled trades the ability to procure.
Building systems equipment, it's all contributing to to those delays. So I don't think there's one thing that we can point to I think it's a bit of a.
Our global contribution of various impacts.
That is leading to project delays.
Across the country really it's not even regional at this point.
Okay.
And then just lastly on the NCI be again, you were a little bit active I'm just curious.
The unit price, where it is maybe a bit higher than what you were buying at a in the quarter.
What are your thoughts on buybacks at this point versus just the development program, which is still fairly a fairly substantial.
Versus maybe some some acquisitions that might be of interest and Im curious what youre seeing on the transaction market as well.
I'll, maybe I'll start and then plus he wants to jump in and she she can.
So the first thing I would say is the NCI P is probably not our preferred.
The method of allocating capital I mean, we always prefer to reinvest in the core portfolio or find new investment or development opportunities, but there is a level at which we find the need to support our unit price and we certainly dip below that floor in the quarter.
You'll see the amount of activity was de Minimis. It was not large so.
I don't think it will be big users of the NCI be on a go forward basis, but when it does get to a certain percentage discount relative to where we feel our NAV is trading we will we will jump into the market too to support the units Leslie I don't know if you have anything to note here that says that's definitely where we're going to be using the S 80 going forward.
Thanks very much.
I guess, maybe just to comment on any thoughts with respect to acquisitions or what's in the market.
I'm not a ton in the market right now there are a couple of couple of marketed opportunities, but nothing nothing unnecessarily.
We're working on I think as I've mentioned in past calls that.
Theres more chatter out there I would suggest you know more people taking calls more people making calls.
To explore.
What it would look like too.
To sell assets.
I think it's gonna be pretty quiet for the balance of the year. That's my my.
My Best guess.
Thanks, very much I'll turn it back.
Thank you.
The next question is from Lauren Kumar from Vishal.
Please go ahead your line is open.
Thank you and good morning, everybody.
Just quickly on the the Dufferin distribution center can you remind us.
The cost and the anticipated yield on the project.
I believe the cost is around $40 million.
I don't think we've ever.
<unk> communicated the exact yield on the project I think we've we've talked about the yield in relative terms for having pursued.
The net zero building relative to our non net zero building and I think probably what I would.
Suggest is from a.
Spread to stabilize a value perspective, we generally target a 100 to 150 basis points over stabilized and I think this would be at the short end of the curve relative to the incremental costs.
Okay Fair enough and then I noticed.
Interest rate range on the debt jumped up the high end jumped up quite a bit was that the credit facility.
Yeah, Laurence philosophy, there that is out of the credit facility as a result of the interest rate hikes that we're continuing to see.
Hopefully not continuing for much more and then maybe just lastly.
Maybe just lastly would you guys consider doing another unsecured to kind of pay down the line given where the spread between probably what you got in unsecured and what the rate is on the on the credit facility.
Sure Lauren.
Either there definitely is a spread there I think the we have to also balance the the quantum of which were drawn under our line of credit and you know and making sure that you know when we issue debentures into the market that you know that there's also a sufficient size to maintain liquidity in any given issue. So I'm thinking of where we are at least sort of 150 million John .
It's probably shy of you know what you've seen us go out to market with four debentures as of late so you know definitely on our radar screen as a potential opportunity for funding as we need as we look through things for the balance of the year.
But that is obviously one of the things we're looking at but.
Probably not today.
Fair enough, Okay, I'll turn it back.
Yes.
Thank you.
The next question is from Sam Damiani from TD Cowen. Please go ahead. Your line is open.
Thank you and good morning, everyone first of all first of all on the yields that Youre doing new investment side and also referencing the RF rest for value discount in terminal cap rates, we've seen obviously a substantial rise in bond yields over the last 18 months.
Let's see your eye for us yields are up about 10 basis points.
Can you just talk about how you're pricing new investments you did the six 6% the new deals announced last night.
In the context of the I guess, the reason bond yields and your eye for us as well.
Sure.
I can take that Sam.
You know I think.
It's always interesting when we disclose our cap rates on a quarter by quarter basis, because it really just describes the basket of investments that we're announcing at that time, sometimes it could be more skewed development.
Development and Densification in urban markets small market. So it really is a point in time in our composition.
Our commentary on really the composition of that bucket.
I think what we're always trying to do is improve the portfolio quality, so whether that'd be by improving our assets by.
Expanding them or adding new developments to our to the portfolio.
Oh.
Increasing the weighted average lease term.
Due process.
We also disclose the cap rates, but I would say, we're even more focused on IRR. So the annual growth.
Doesn't really necessarily get taken into consideration the one metric we actually speak to in the press releases.
So overall I think we have seen.
The yields or cap rates for our new investment activity rise over time, along with rising bond yields we've had a lot of conversations that are productive with Canadian tire on how the market is moving and how our cost of capital has impacted our ability to finance some of that new activity. So I think we are keeping track.
Lockstep with with those movements.
But obviously each particular announcement as a moment in time that speaks to a particular composition of assets in deals and we're trying to manage obviously the relationship and the ability to continue supporting Canadian hires growth overtime.
When we engage in those discussions as well.
Oh, that's great. That's helpful. Thank you and just a couple quick ones too for me to finish off here I think you mentioned all but one.
Our store leases have now been extended I Wonder if you could just address the last remaining one.
And also just on the.
Property leasing spreads over 10% I wonder if you could be a little bit more specific and compare that to.
<unk> historical average on third party leases.
Good morning, Sam its Jodi. So on your first question in terms of the all but one in 'twenty 'twenty four expiry are that one there's no issue or anything there. Its I cant eating tires is contemplating a potential expansion and onsite a relocation in our particular case and so while they work through that.
It'll get extended out at it.
Long before the expiry it'll get extended so it's just out there trying to sort out what they want to do with that particular asset, which will result in further growth stuff or the reach on your second question in terms of the north of 10% on the non Canadian tire stores. I'm. This is I'd say at this particular quarter is probably higher than previous quarters.
I don't know if it's going to set a future trend in this regard, but certainly we are always looking to get to the highest spreads as possible, especially in this environment. So we'll see how this plays out with the next round of renewals that come forward, but we're quite pleased with this at this particular spread.
And that spread would be sort of.
That's 8% historically would you say Jordan.
Yeah, we've always we've I think high single digits is probably.
Accurate salmon this would probably be almost double double that.
Excellent. Thank you and I'll turn it back.
Thank you. The next question is from Tal Woolley from National Bank Financial. Please go ahead. Your line is open.
Hi, good morning.
Just wanted to ask about L. B.
The development pipeline.
You know one of the great things is that you know it moves along fairly quickly and converts to cash.
You know in fairly short order.
In terms of like the ability to grow that maybe youre accelerate but is the rate limiting factor you or simi entire.
It's probably a resource issue more than anything in terms of how quickly we can actually pushing new projects to the pipeline collectively both on our side Anthony entire I would suggest the current level is one we're quite pleased with.
In terms of managing risk and at the same time growth.
You know to the extent there is more or we can do or should do we will obviously.
Contemplate, adding adding to the size of the pipeline, but nearly 400 million.
For the next call. It 24 months I think that's that's a level that we can and are collectively have.
Our level of comfort with.
Okay.
And then just lastly on the Canada Square development I'm, just wondering you know Eglinton LRT, what your best kind of I know a lot of you know that kind of has to get done before things can really kick off in earnest, but maybe you can just sort of give us an update on where you see timing and next steps for.
For that project.
Well before we got on the call Jody was just complaining about the construction and the fact that she might have got a nail in their tire so.
[laughter], we'd see no let up visibly close to home office.
In terms of.
Qs or signals that would indicate are nearing completion.
There's no specific guidance, our news from Metro lengths TTC, our cross links.
As it relates to progress they're making.
So we have no specific update our guidance that we can provide them. The other thing I can say is the discussions with the city as it relates to our rezoning proposal that Oxford is managing and leading continues to go well you know our best guesses.
Possibly by the end of this year, but more likely the beginning of next year, we're hoping to.
Achieve our rezoning.
Yeah. It was subject to certain site conditions, but we are working closely with Oxford to advance the plans.
We take next steps and.
Hopefully.
The timing of our approvals will also dovetail with the timing of the <unk> completion, but that is obviously out of our hands.
Okay, that's great thanks very much.
Thanks Al.
Thank you the next question.
Is from semi I see it from CIBC. Please go ahead. Your line is open.
Thanks, Good morning.
So firstly, if you could share your thoughts around setting up the ATM in the quarter and the potential that he was up any funds.
Yeah.
Sure and it's my it'll be the ATM just as we set their N CIB up last year, we set or the a T M them concurrently with different even if our base shelf prospectus in the second quarter and really you know for US. It's another tool in the tool belt, you know, where we're not necessarily expecting too.
See any kind of huge issuances under this but I think you know we want to be able to have that as an opportunity and you know assuming our unit price gets to a level, where we would be comfortable issuing equity.
We would have that is another tool that we could use them and we think it suits us with the sort of smaller size, you know asset development et cetera that adding you know small bits of actually at the right time over the next couple of years, what would be a good pet for us.
Do you think that.
And this is more of an overarching question, but how do you guys view your industrial assets in the context of your portfolio.
With the caliber you're kind of nearing completion would you say that asset. It's a long term hold or would you be open to recycling if the opportunity were to present itself.
I think we view them more as long term holds there sort of mission critical facilities for Canadian tire.
For us we have very long term leases on so with with obviously embedded annual growth and we like that.
At about 15% of our portfolio a little bit less you know it certainly.
A sizeable component that's one we'd be we'd be potentially interested in growing for the right type of asset I mean, we're not going to be.
Out there expecting industrial land and just trying to compete.
Compete with merchant developers, but we think theres opportunity within the Canadian tire ecosystem could potentially.
Find find more industrial opportunities and I wouldn't suggest.
That we're looking to recycle capital.
As it relates to those assets at this time.
Okay, great. Thank you for that 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 Salzburg, President and CEO for closing remarks.
Thank you Paul and thank you all for joining us today.
I hope you enjoy the rest of your summer and we look forward to speaking with you again in November after we release, our Q3 results. Thank you have a good day.
Thank you. This concludes today's call you may now disconnect your lines.
Yeah.