Q4 2023 Choice Properties Real Estate Investment Trust Earnings Call
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Okay.
Thank you for standing by my name is Greg and I will be your conference operator today at this time I would like to welcome everyone to choice properties Real estate investment Trust fourth quarter 2023 earnings 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 this time simply press star one on your telephone keypad and if you'd like to withdraw your question simply press Star one again. Thank you.
I would now like to turn the call over to Aaron Johnston Senior Vice President Finance, Erin you have the floor.
Thank you.
Good morning, and welcome to choice properties Q4, 2023 conference call.
I'm joined here this morning by real Diamonds, President and Chief Executive Officer, Mario Bearish, Sato, Chief Financial Officer, and now Collins Chief operating officer.
I'll start the call today by providing a brief recap of our 2023 performance and cover the highlights of the fourth quarter.
Mario will discuss our operational results and conclude the 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 start 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.
Look and similar statements concerning anticipated future events resolve circumstances performance alright.
Alright, alright.
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 can impact our financial results and estimates and the assumptions that were made in applying in making these statements can be found in our recently filed Q4 2023, <unk> financial statements and management discussion and analysis, which are available on our website and on SEDAR.
And with that I will turn the call over to Ralph.
Thank you Erin and good morning, everyone 2023 was an exceptional year for our business as we delivered strong financial and operating results at the beginning of the year, we discuss our financial goals of capital preservation generating stable and growing cash flow and delivering nab and distribution growth over time.
Hi.
Our team successfully delivered on these goals.
Focusing on our three strategic priorities, while maintaining our market leading portfolio sustaining operational excellence and delivering on our development pipeline.
We maintained our market leading portfolio.
By continuing to be one of the most active reached in the transactions market.
It enhanced the quality of our portfolio by completing approximately $620 million in real estate transactions, including $285 million of acquisitions and 335 million of dispositions.
We also continued to deliver on our development pipeline by adding high quality real estate to our portfolio. This included one 8 million square feet of retail and industrial space, along with residential rental building named element in Ottawa.
Our investment of approximately $295 million.
At an average yield of seven 7%, resulting in significant NAV creation is the current fair value of these investments these are the $425 million.
Finally, we successfully met our 2023 Oclock, we maintained near full occupancy rates through the year and achieved a same assets.
Cash NOI and <unk> growth targets.
Turning to the operating and economic environment for a moment, we remain encouraged by the supply demand trends that are supporting each of our asset classes, specifically, our retail tenants continue to expand its store network and suburban trade areas continued to perform well despite headlines regarding the slowdown in <unk>.
Rent growth there remain substantial embedded growth within our existing portfolio as evidenced by the 66% rent spread we achieved this past quarter.
While we are optimistic regarding underlying fundamentals of our asset classes wait knowledge that significantly higher borrowing costs recessionary fears and geopolitical threats continue to cause uncertainty and overall market volatility. Nevertheless, I am confident that choice remains in an enviable position.
And well prepared to navigate these uncertain times.
The quality of our real estate, which includes grocery anchored neighborhood centers industrial properties with inherent brand growth and high quality residential properties provides a strong buffer against potential economic impacts.
Another source of confidence logging, a strong balance sheet and significant liquidity position.
Real estate is a very capital intensive business and having a strong balance sheet is a must.
We have been disciplined in our strategy of maintaining low debt bridge and over the past year, we have proven our commitment to a staggered debt maturity profile targeting a 10 year data.
The strength of our balance sheet enables us to maintain consistency in our development activities and importantly, we have the flexibility to be opportunistic.
While the company and say, we have enough business to continue to deliver steady and growing cash flows supported by a strong and stable Foundation.
Prestige has approved another distribution increase effective March 2024.
This increase demonstrates our commitment to sharing opera without unitholders.
Turning to our fourth quarter results our momentum continued in the quarter, we delivered increases in same asset cash NOI and as a follow up.
Four 2% and five 8% respectively.
Leasing activity continues to be strong and the portfolio remains near full occupancy at 98% up 30 basis points compared to last quarter, we had strong rental rate growth with an average rent spread of 23% in the quarter supported by strong fundamentals in each of our <unk>.
Three strategic asset classes.
During the quarter, we continued to execute on our capital recycling program, completing $239 million of transactions, including $83 million of acquisitions and 156 million of dispositions, we acquired two high quality grocery anchored retail properties in greater Montreal, and one industrial property from law.
No.
The industrial property is a 425000 square foot building in Calgary leased to shoppers drug Mart. This asset is in an established industrial node and its 15 minutes from Calgary Airport. We have 10 to 15 year leases are these three properties with 2% annual rent steps.
Included in 156 million of dispositions was $93 million related to selling our retail asset two industrial buildings and a noncore office building mentioned on the Q3 call additional sales in the quarter, including the industrial asset in Dartmouth four $7 billion to retail to retail assets in Canada specie.
$250 million and a land parcel adjacent to a retail store they may have been better for $6 million.
Turning to other developments, we delivered full retail units two industrial projects and one purpose built rental buildings during the quarter.
Included in our industrial development Transference was approximately 980000 square feet related to the first phase of a project at choice East way Industrial Center <unk> leads to loblaw.
This phase of the project was delivered with an expected stabilized yield of seven 8% also included enough transfers was screened with 50000 square feet, a choice industrial Sanjay British Columbia, which I spoke about on our Q3 call. This project with 11 with an expected stabilized yield.
10, 2% cash range on both sides commenced in January of this year.
We also delivered one residential development in.
In Ottawa.
In which we are in a 50% interest. This development of 252 units offers a unique rental community in the vibrant waste program H one of auto is.
Most desirable neighborhoods the building with the level and an expected stabilized yield of five 1%. There continues to be strong demand at the building and it is now 44% occupied and 58% leased with stabilization expected in the second half of this year.
With that I'll hand, it over to Barry to provide more color on our operational and financial results.
Thank you Ralph and good morning, everyone.
As Rob mentioned Q4 was another strong quarter operationally as our business continues to operate at a high level of occupancy and deliver strong same asset NOI growth.
Starting with funds from operations, our reported <unk> for the fourth quarter was $184 6 million or $25 five per unit.
Included in <unk> in the quarter were net onetime items of $5 8 million, including $5 7 million related to the cash portion of the special distribution and our condo gain of $4 6 million related to our Mount Pleasant village development, where we sold our ownership interest in 94 of 142 combo units.
This was offset by approximately $4 5 million of G&A from one time payments.
On a per unit diluted basis, our fourth quarter and full of.
Of $25.05 per unit reflects an increase of approximately five 8% from the fourth quarter of 2022. This.
This was driven by strong same asset NOI higher interest income and onetime income partially offset by higher interest expense from financing is completed for the last year and higher G&A costs relate to the growth and transformation of our platform.
We ended the quarter with occupancy of 98% an increase of 30 basis points from Q3.
On a total portfolio basis, we had approximately $1 1 million square feet of leases leases expire we had tenant retention of 85, 8% for nearly 1 million square feet at an average spread of 23%.
And we also completed 222000 square feet of new leasing that commenced in the quarter.
This activity resulted in positive absorption of 63000 square feet, which is mainly driven by new leasing in our industrial segment in Alberta.
And our necessity based retail portfolio, which is the largest in Canada.
Currency remained relatively stable at 97, 7%, we completed 600000 square feet of retail renewals in the quarter, resulting in tenant retention of 78, 7%.
Renewals were completed at rents, 14% above expiring.
Occupancy in our industrial portfolio, when compared to Q3 increased 70 basis points to 99%.
We had 400000 square feet of industrial leases across Canada expired in the quarter, we renewed 395000 square feet at rents.
At least 60% above expiring achieving tenant retention of 98, 8%.
This leasing activity contributed to statement asset cash NOI, increasing by $9 6 million or four 2% compared to the fourth quarter of 2022.
By asset class retail same asset cash NOI increased by $5 8 million or three 2% the.
The increase was driven primarily by higher base rent on renewals, new leasing and contractual step brands and higher capital and operating recoveries.
Industrial same asset cash NOI increased by $3 1 million or eight 5%.
This increase was primarily due to higher rental rates for both renewals and new leases completed as well as higher recoveries.
Mixed use and residential say naphtha cash NOI increased by approximately 700000 or nine 3% an increase was driven by higher recoveries and improved residential occupancy and other revenues.
And one last word up performance before I move onto our balance sheet.
Investor Day earlier this year, we shared how 2023 would be an important year for our business our efforts to improve portfolio quality right size, the balance sheet and invest in our development platform has now put us in a position to generate resilient and growing cash flows. We are extremely pleased that in 2023, we met or exceeded the financial targets reflect.
In our outlook and are once again able to increase our distributions to unit holders.
Now turning to our balance sheet alright for snap was relatively flat with a slight decrease of $14 2 million compared to the third quarter of 2020 through the.
The change was driven by $33 9 million increase in retained earnings and a fair value increase on our investment in Allied properties of $26 6 million, where we required a drive for us to Mark to market. This investment was trading price as of December 31.
And this was offset by net fair value losses of $73 3 million on investment properties.
While our properties continue to generate strong cash flow growth ongoing elevated interest rates continue to put upward pressure on cap rates or fifth our fair value loss in the quarter was largely driven by this as we reflect an expansion of cap rates within certain asset classes or market segments.
In our retail portfolio, we recorded a small loss related to cap rate expansion on certain properties, primarily in western Canada, and our industrial portfolio. We recorded a fair value loss, primarily due to cap rate expansion on certain properties with limited near term rental rate growth.
And in our mixed use and residential portfolio, we recorded a small loss in the quarter driven by cap rate expansion and a change in lease up assumptions for the office portion of one of our mixed use developments.
We ended the quarter in a year and solid cash position with strong debt metrics and ample liquidity we.
We received the proceeds from allies $200 million promissory note at the end of the quarter and subsequent to year end, we used the proceeds to repay our $200 million series B debenture at four 3% upon maturity.
Our debt to EBITDA ratio net of this cash is two seven times and we now have $1 5 billion available. Our facility. This is further supported by approximately $12 7 billion of unencumbered properties.
Looking ahead.
We have $700 million of remaining debt maturities for 2024, with a $550 million unsecured debenture, which was our largest debt maturity for the year not coming due until September.
Once again we.
Demonstrated the strength of our portfolio and the ability of our teams to deliver we have confidence our business to continue to deliver steady and growing cash flows to our unit holders.
In addition to our fourth quarter and 2023 results. We have shared our 2020 for outlook and in 2024, we expect to deliver stable occupancy was two 5% to 3% year over year growth in same asset NOI annually.
Annual <unk> per unit diluted between $1 to $1 <unk> per unit, which reflects a 2% to 3% year over year growth.
And debt to EBITDA slightly below seven five times.
And with that rail now Aaron and I will be glad to answer your questions.
Alright, Thank you very much and just as a reminder, if you would like to ask a question simply press star one on your Touchtone phone once again star one on your Touchtone phone.
And we will pause just a moment to compile the Q&A roster.
And it looks like our first question is from Mike Mark heaters with BMO capital markets. Mike. Please go ahead.
Hi, Thank you good morning.
Barry.
Maybe I'm missing something here, but I think you ended seven times debt to EBITDA and where your outlook calls for slightly less than seven and half times debt to EBITDA can you just walk us through the drivers of that increase rather.
Rather than the outlook please.
Sorry, yes, so right now we're at seven times and really the factor is.
That helped.
Our dispositions so we still have an acquisition plan.
And if it's funded by dispositions will be on the lower end of the range, but if we have.
To use debt to finance some of these acquisitions that will get looked at.
Closer to $7 5 million.
That's right Scott.
So within your guidance, what's the acquisition assumption or net acquisition assumptions.
So right now we.
We have we have a balanced capital recycling program Israel set so we plan to fight we plan to grow by about $150 million to $200 million of acquisitions.
And we had the disposition close at the end of this year that will carryover so.
We need about 150 million of dispositions.
Two to fund that.
Got it okay. So then the increase in the debt to EBITDA assumes you don't do any capital recycling, but you do execute on the assets that you want to acquire exactly.
One thing that's out of our control.
Yes.
We also have development of approximately $300 million that would have to incur as well.
And of course of course, okay.
Alright, just sort of a higher level question here.
You guys are clearly getting great returns on your.
Your retail and your industrial.
Industrial developments in metal.
Set to continue over the next couple of years.
I know, we all I think it was last call you talked about perhaps maybe getting started on one of the larger mixed use.
Urban projects that you have with the significant resi component I guess rates are still bouncing around here, we've had some enhanced GST.
Rebate.
The.
Favorable financing from the CMA sea, so with all that sort of into the.
Into the mix how are you guys thinking about.
Risk and returns on the.
Major mixed use projects going forward.
And so just wanted to ask your question.
So for 2024, we primarily going to be focused on and commercial development.
And it's not because we're not long term bullish on residential we actually don't have anything that we believe we can actually be truly shovel ready for to actually commence construction in 2024. So there are at least would likely be late 2020 for early 2025.
And as I said long term, we take a long term view on on residential and we are bullish and knowledge with me on the phone here. Maybe you can just comment on what are we seeing on the residential side.
Hey, Mike how are you.
We're really seeing that.
We are seeing a change in construction costs.
The productivity around that is improving as well. So we're hoping that costs are going to come down to offset a little whether that interest increase.
But the PSC GSE revert has done a lot too.
Subsidize these projects as well as try and accelerate projects ahead of the Sunset date of 2030. So we are pushing ahead on a number of our key projects.
Both our master planned sites are standalone sites as well.
Okay and.
Last one for me before I turn it back I, just I guess just in the case when you have an existing.
Loblaw lease presumably with with options.
To continue how does that dynamic work would you have to sort of.
Buyout or make a payment for development rights.
Or just the release get rewritten.
As the story gets rebuilt just trying to get a sense of the dynamics there going forward.
Yes.
As you'll recall, we have a strategic alliance agreement, which sets out.
Payments on a per foot basis that we are loblaw, depending if we doing rental or condo and depending on the market.
So I guess the positive is that pre negotiated the amount we are novel and both parties are incentivized to make it to make it happen.
The reality as well is that so many of our thoughts was large enough that we actually don't need to.
Close to existing solar so for example golden mile.
Golden mile. We can actually start the first phase of construction without ever touching the store, we can actually do the second phase, which we plan to rebuild that.
New grocery store, so our golden mode whenever that to close there's another one in the GTA, which we actually working with love low on the timing on and we get great visibility into their plans when they would be willing to close that.
And then another one in Vancouver as an example in Queensland and the same thing they are actually closed the store and we are really planning a mixed use development on unauthorized side. So I would say in the short term there is nothing imminent, but generally it's we just worked together closely since I know timing of it and make sure what makes sense Paul obviously.
Both businesses, but as I said, a real competitive advantage is that so many of his thoughts are large enough that we should never have to close the store.
Got it Okay, and then the strategic alignment pardon me that the payments within the strategic Alliance agreement, that's just where the density.
There's no there's no development rights necessarily embedded with that within the leases themselves, but the sector large enough. So not an issue at least in the foreseeable future.
Well generally all tenants have.
Okay. That's helpful control soda certain control lots under the properties that I would say that the choices in a phenomenal position opposite loblaw or adjacent to loblaw.
To work together and do what makes sense for the size.
Got it okay, great. Thanks, very much and congrats on the strong 23.
Thanks.
Thanks, Mike.
And our next question comes from the line of Lorne Kalmar with Desjardin Laura go ahead.
Thank you very much morning, everybody.
Maybe just flipping over to the industrial portfolio things seemed to really accelerate you talked a little bit about some of the slowdown we're seeing in the headlines you guys aren't really seeing in your portfolio do you think.
The performance achieved in 2023 is repeatable in 2024.
Okay.
We do believe it's achievable.
The first thing is look we acknowledge that there is a slowdown I'll keep total market vacancy rates are up slightly it's still exceptionally talk markets.
It's just the rent growth.
Is slowing compared to what had previously grew at.
But we still have healthy embedded rent growth in our portfolio, we still getting.
Strong demand on the pre leasing side that we're looking at on our development. So we do expect 2024.
To continue on a remodel if you want to add anything like.
Our renewal rates are quite low so we are in a very good position.
Would you guys have an estimate of what the Mark to market is on 2024 Expiries.
It's going to be significant.
It's in the region of around 65 to north of 100 ish.
Alright, thank you.
That's yeah that sets up for a good 2004.
And then.
Mario if I heard you correctly I think you said retention and retail was 73% I'm, assuming that's excluding loblaw is that correct.
Yes, yes for the for that quarter, because level I think for a lot of renewed that quarter yet.
I was just wondering if theyre not for tenants that arent renewing what type of tenant is and what do they do it are they closing or relocating.
We had.
It was all western Calgary the biggest vacancy was a rental depots. So they were they were leaving.
Leaving and we've now basically demise the space, we backfill of over half of it. So it was just an isolated incident nothing.
Nothing about a region or an area.
Okay. Okay. Okay. So it's just that that one lease Calgary. Thank you.
Then maybe just lastly on the Mount Pleasant condos.
What do you guys expect the cadence of the gains to be on on those on the remainder.
I'm, assuming I won't assume but is that factored into the guidance.
Yes, that's factored into the guidance because those units have been sold quite a few years ago. So it's really just closing on preexisting contracts, we don't see any real gain on them.
Laurie it's about it'll be reflected in our Q1 numbers and I suppose it's fallen since it's a quarter of the the rest of the condos at about $2 million.
Perfect. Thank you very much I will turn it back.
Alright, Thanks Lauren.
Just a reminder, if you'd like to ask a question again star one on your telephone keypad once again star one.
And it looks like our next question is from the line of <unk> with CIBC. Please go ahead.
Thanks, Good morning, just firstly on the outlook just wondering in terms of contribution by segment and just the different pieces.
Fair to say retail it be steady in the three ish percentage range, and maybe slightly lower contribution from industrial and mixed use compared to 2023.
Yes, that'd be a good way to look at it.
Again with the retail.
5% of things the good target and again, we've always said industrial would be up mid single digits.
Okay.
And then on industrial and I guess, specifically, what you have underway and Kevin talk obviously, it's a fairly active node.
Are you seeing there in terms of tenant interest in.
Lease up Timeframes.
So I'll start and then I'll, we'll just give additional color.
No.
We announced last quarter with leased.
A building that we are getting built on spec.
A third party logistics firm, we have a lot of software because we actually underway on the project right now and we're starting to market.
Call. It the next phase of the project, we've had strong interest bad.
Still there's still quite a bit still a way away like we are continuing to respond to rfps and there is some very large users out there that are very interested in the site, especially with the momentum we've got from that from that recently.
Okay, so should be able to meet your timing expectations.
Thanks for that and then the last question I had was just a broader one on.
On strategy now that he has hit the milestone of exiting office.
What should we view as the next upcoming milestone in the evolution of debate.
Look I think we have a phenomenal operating plan and where we're going to keep.
Growing our industrial portfolio through the development now spoke about through capturing those embedded rent spreads on both the retail and industrial and then slowly executing on the mixed use and residential pipeline and as we have said earlier on the call maintaining that strengthen the balance sheet.
Okay sounds good I'll turn it back.
Alright, Thank you very much.
And it looks like our final question today comes from Sam Damiani with TD Cowen Sam. Please go ahead.
Thanks, and good morning, everyone and I'll Echo the congratulations on the 2023 results.
Maybe rail for you on the the Calvert and it's got a little bit of discussion here, but you've got the building coming on later this year building age coming on early 'twenty, six, but there's kind of a.
Hole in the completions with 2025 is there is there a potential and are you striving for.
Initiating construction on an industrial property that could be completed during during 2025 is there an opportunity for that.
Yes.
No I'll answer the question better months and thanks, so much.
Its not likely for 25 like I said, we are responding to some rfps, they're very large demands, but that's that timeline is probably an 18 month building.
So not 25, most likely 'twenty six.
Yes, Sam.
In the first.
Then that leads to loblaw I believe stock commencing rent in early 'twenty five.
It's 25 for that 126 is now set for the next one.
Yeah.
Right.
Okay. Thank you and then.
Are you looking at acquiring more land more industrial land in and around the GTA at this point.
We acquired Calvin.
Ed.
Inopportune time was during COVID-19 when when we use our balance sheet strength to acquire the large piece of land at very attractive pricing.
Since we acquired that land there was a massive run up in what people pay for land.
Some of those developers cannot hold onto their land.
Just given what's going on in the environment with high carrying costs.
And a potential slowdown in.
Just leasing velocity in the industrial I must say potential because speculate obviously.
They may be a window of opportunity, but we get to remain very very prudent and make sure that we can create value on any land purchases and right now we have more than enough on our plate to keep going.
Okay very clear thank you.
And just on the guidance what would be the key drivers that would cause same property NOI growth in 2004.
To be at 3% Max versus last years, four 5% what would be the main drivers lowering the growth rates from what we saw last year.
I think I think first of all though the numbers are strong and they're coming off a strong 2023. So so just because the numbers a bit lower doesn't mean the quality of the portfolio is still out there. So this is really coming off of a high number in 2023.
Yes.
Really it does come down to real estate as the retail market.
Strong.
And so.
Outside with just pushing rents that higher end.
And right now it is strong, but we will see what happens with the economy and consumer strength and how retailers do but out but again with the visibility. We have we still think delivering at 2% for retail coming off a high base is a good number.
Okay. That's helpful and last one for me just on the sort of tenant watch list or our risk list or whatever.
Call It hasnt grown for for your portfolio in the last three months to six months and if so what categories or retailers are you perhaps increasingly.
Concerned about.
Look I don't think it's grown for our portfolio.
There are a few of the big box Big box says that.
A few of the big boxes.
<unk>.
Spanned Ed.
Bed Bath <unk> beyond.
We are bankrupt that are under some pressure and I think.
We don't have any exposure to that today, but HBC would be concerning.
More so now than maybe a couple of years ago rail is that something you would see more is more likely.
Again, we don't have great visibility, but we just hear anecdotally through our leasing people that.
The stores aren't doing well.
Turn it back thank you.
Okay. Thanks, Sam.
And that does conclude our Q&A session. So I will now turn it back to CEO Rael Diamond for closing remarks rail you have the floor.
Thank you Greg to summarize we're very pleased with our fourth quarter and 2023 operating performance.
<unk> strong enough team is well positioned to continue to execute on our strategy and deliver on our 2020, Paul. Thank you for your interest.
The investment choice and for joining us this morning.
Thanks rail, ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect have a great day everyone.
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