Q2 2024 Choice Properties Real Estate Investment Trust Earnings Call
Thank you for your tenants right.
Eric and I will be conference operator today.
This time I would like to welcome everyone to the choice Properties' Real estate investment Trust second quarter 2024 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
Who'd like to ask a question during this time.
Simply press Star followed by the number one on your telephone keypad.
So I'd like to withdraw your question.
Costar will again.
I would now like to turn the call over to Eric Johnson Senior VP of Finance. Please go ahead.
Thank you.
And welcome to choice properties Q2, 'twenty 'twenty four conference call I'm joined here. This morning by round Diamond President and Chief Executive Officer.
Saddam Chief Financial Officer, and now Collins, Chief operating officer.
Well, let's start the call today by providing a brief recap of our second quarter performance and provide an update on the transaction and development activity in the quarter now I will discuss our operational results followed by Mario who could.
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 that by discussing our financial and operating performance and are 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 results circumstances performance or exceptions that are not historical fact these statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward looking statements.
Actual information of 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 Q2 2024 financial statements and minute 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.
Very pleased with our performance this quarter as once again, we delivered solid operating and financial results.
Portfolio continues to deliver stable and growing cash flow, we maintained near full occupancy.
<unk> in the quarter at 98% achieved strong leasing spreads of 48, 2% and delivered same asset cash NOI growth of four 4%.
Strong operating metrics this quarter reflect the strength and resilience of our portfolio.
For the quarter was impacted by the timing of lease termination income and certain one time costs related to our continued focus on operation operational efficiency.
Leading these impacts.
Our increased five 7% year over year.
On the retail side, we are seeing certain discretionary retail tenants impacted by the overall health of the Canadian consumer however, grocery anchored necessity based retail side yet is <unk>.
Going exceptionally well and demand plus base is strong.
Our leasing team is actively working with many of our tenants were looking to further expand their footprints.
And industrial despite the slowdown the rate credit demand for well located high quality assets remains strong as evidenced by our leasing activity. This quarter, we remain confident in our ability to deliver growth through our industrial development pipeline.
Prime locations large contiguous blocks of land and attractive land cost allow us to deliver high quality product into the right segments of the market at competitive rental rates.
Our residential assets are also performing well with <unk>.
Newer assets, both over 80% leased and are expected to stabilize this year, although the current environment will impact certain developers focused on condos limited rent as residential construction.
And overall lack of housing availability provides long term tailwind for the residential asset class.
Turning back to activity in the quarter in pursuit of maintaining a market leading portfolio. We continue to execute on our capital recycling program. This involves completing approximately 114 million in total real estate transactions in the quarter, specifically, we acquired two grocery anchored retail.
Assets with.
$33 million and successfully disposed of four properties totaling $81 million.
The first with the acquisition of cornerstone shopping center in Fort Saskatchewan, Alberta by purchasing our partner's 50%.
And state or about $21 million.
We now fully on this 200000 square foot high quality grocery anchored shopping center.
The second acquisition was a vacant 30000 square foot stand alone retail property drawn up for approximately $12 million and concurrently listed to loblaw for 15 years lateral pads to open a small format both pools on the side as part of the overall small format store expansion plan. This transact.
As an example of the strategic benefits of our relationship to both choice and local.
As a physician activity included the sale of our non managing partnership interests and two retail properties in Alberta, and two retail partners easy in Saskatchewan for total proceeds of approximately 81 million in the quarter.
We also continue to add value through our development pipeline with a near term focus on commercial development during the quarter, we transferred approximately 44000 square feet of retail GLA through ongoing intensification of our neighborhood centers. This intensification included a 17000 square foot charters.
Doug: Doug one in Alberta, and a ground lease to nautical land group and breath at Ontario.
This is the first of six ground leases with nautical NEDS without developing independent living options for adults over 65.
Speaker Change: 55, sorry does a great partnership for choice as it is complementary to our retail sites and will generate a stable and growing cash flow stream for choice.
Our active industrial developments are progressing well and choice Calvin business Park, we are progressing on the first two phases, providing 175 million square feet of new logistics space.
Space has allowed me to loblaw with thoughts servicing underway the second phase of Easter, leading logistics provider in the tendering stage with construction expected to start later this year.
Our portfolio performance and our ability to deliver on our strategic priorities, regardless of the economic climate.
Clearly supported by the strength of our balance sheet and the quality of our credits often speak about the importance of prudent capital management and risk management.
Despite encouraging inflation trends and the bank of Canada, making its first interest rate cuts in June the interest rate environment remains volatile.
We do not foresee a substantial drop in long term interest rates and then yet future. We believe that companies with strong balance sheets blockhouse will consistently outperform in the long run.
As a result of our team as a result, our team is committed to preserving our industry, leading balance sheet they've demonstrated their ability to treat to do just this through our financing activities and the credit rating upgrade we received in the quarter, which Mario will speak to shortly but first I'll pass the call.
Mario: All over to now to discuss our operational results now.
Good morning, everyone, Israel mentioned, our portfolio continues to perform well.
We are pleased with our operating performance for the quarter.
Occupancy remained strong ending the quarter at near full occupancy at 98%.
During the quarter, our portfolio had an approximately 816000 square feet of lease Expiries, we renewed 743000, achieving a 91% tenant retention.
These renewals were completed at an average rent spread of 48, 2%.
We also completed 88000 square feet of new leasing contributing to positive absorptions 15000 square feet.
Our retail portfolio occupancy remained stable at 97, 7%.
During the quarter 390000 square feet expired and we renewed 350000 square feet at an 89, 7% of attention the lease renewal spreads averaged 12, 8% above expiring rents.
The majority of our lease renewals were in Ontario, with strong spreads across several retail categories.
We also completed 41000 square feet of new retail leasing in the quarter.
Offsetting 40000 square feet of expiring not renewing in the quarter.
Of the Nonrenewed space approximately half has backflow commitments that was achieved on average 13, 4% higher net rates compared to previous tenants. We have strong interest in the remaining space.
As Ramon mentioned demand for necessity based tenants remained strong as retailers continue to seek out well located well anchor properties.
However, in the current economic environment consumers continue to be more cost conscious creating pressure for tenants, whose businesses rely on discretionary spending.
Fortunately, we have a small number of these tenants on our watch list as most of our tenants are necessity based we do not expect any significant impact of about 2020 for performance.
During the second quarter, we generated $1 2 million in lease surrender revenue 801000 list for the settlement of our nordstrom's location in Edmonton, Alberta.
Also continue with our Loblaw store optimization program generating 400000 of lease surrender revenue at the grocery store and <unk>.
This space was backfill by a new tenant at higher rental rates.
We turn our attention to 2025 for a moment, we have 48 loblaw locations up for renewal consisting of 47 retail locations and one industrial site totaling $3 2 million square feet.
Subsequent to the quarter, we renewed 46 of these locations totaling $3 1 million square feet at a weighted average term of five years.
The base rent for the 46 locations increased on average by eight 4% over expiring rents. The two sites that were not renewed our stores that have gone dark first is uncalled quick RPC outlook side with a long term redevelopment plan.
<unk> site in Laval, Quebec, we intend to sell as part of our capital recycling program.
Our industrial portfolio occupancy also remained stable at 98, 8% with 424000 square feet of expiring.
Mm 391000 square feet for a tenant retention is 92, 2%.
The lease renewals spreads averaged 105, 9% of expiring. This was largely driven by 180 180000 square feet of renewals in Ontario at spreads of 184, 3%. We also completed 47000 square feet of new leases.
While I recognize that the growth in the industrial market has slowed we still have significant embedded rent growth in our portfolio as our average in place rent is $9 in parts of June.
Compared to $9 16 last quarter for the remainder of the year, we expect a modest decline in occupancy due to a few known vacancies, which were contemplated in our plans and outlook. Our team are actively working on back filling this space.
I'll now pass it over to Mario to discuss our financial performance.
Thank you good morning, everyone.
Once again, we're pleased with our financial performance for the second quarter. Our business is strong operationally and remains well positioned to continue to deliver high occupancy and strong same asset NOI and <unk> growth.
Our reported funds from operations for the second quarter was $184 7 million or $25.05 per unit.
Following the quarter was impacted by certain nonrecurring items, including restructuring costs of $3 3 million related to the outsourcing of a portion of our accounting function.
Offset by the reversal of a $1 7 million provision related to a tenant dispute in our industrial portfolio.
Lease rental revenue of $1 2 million for a net cost of 400000 <unk>.
On a per unit diluted basis, our reported second quarter episodes of $25.05 per unit.
That's an increase of approximately 4% from the second quarter of 2023.
When normalizing for a year over year nonrecurring items, including the $4 million lease surrender income reported in Q2 of last year asphalt per unit increased five 7%.
And this increase was driven by strong same asset and transaction NOI, partially offset by higher interest expense net of higher interest income.
Strong leasing activity contributed to same asset cash NOI growth of $10 2 million or four 4% compared to the second quarter of 2023.
By asset class retail same asset cash NOI increased by $5 5 million or 3%. The increase was primarily driven by higher base rent on renewals, new leasing contractual rent steps and higher capital and operating recoveries.
Industrial say massive cash NOI increased by approximately $4 7 million or 11, 8%. This increase was primarily due to higher base rents from leasing activity higher capital recoveries and the reversal of the provision.
Mario: Provision following the resolution of a tenant dispute and excluding the tenant dispute resolution, our industrial portfolio increased by seven 4% year over year.
Now turning to our balance sheet, our eye for US now for the quarter was $13 79 per unit, an increase of $76 $6 million or 7% over the last quarter.
<unk> growth was driven by the contribution of $47 2 million from operations.
Fair value gains of $25 5 million on our investment properties and income, resulting from the reversal of a prior year transaction related provision of $38 6 million, which was partially offset by a fair value loss of $27 9 million and our investment in the units of Allied properties, where were required and drive for rest of the mark to market.
Investment to its trading price at the end of each period.
Our fair value gains on investment properties in the quarter was largely driven by cash flow growth in the retail industrial portfolio.
Partially offset by a seven basis point cap rate expansion within our industrial portfolio.
Due to continued price discovery and certain GTA and Vancouver assets.
In our retail portfolio, we recorded a fair value gain related to cash flow growth and minor cap rate adjustments in our industrial portfolio. We recorded a fair value loss, primarily due to cap rate expansion on certain properties with longer term leases. This was partially offset by gains from cash flow growth as leases rollover to market rental rates.
Our mixed use and residential portfolio was relatively flat.
Now turning to financial activities for the quarter.
We continue to focus on prudent capital management and ended the quarter in a solid financial position with strong debt metrics and ample liquidity.
Our debt to EBITDA ratio was six nine times when you factor in the cash raised on our recent unsecured debenture issue, which I will expand on shortly.
We also have $1 5 billion available on our credit facility and approximately $12 8 billion of unencumbered properties.
During the quarter, we completed $788 million of new debt financings for an average term of 10 years and an interest rate of 5%.
This includes the issuance of $500 million in unsecured debentures at five 3% for a term of approximately seven years.
The proceeds have been invested in our fixed rate GIC, earning five 5% interest until September when we will apply the funds to repay a portion of that are insuring $550 million series K senior unsecured debentures.
For equity for debt to EBITDA computation, we have netted the cash against that debt to avoid the double count.
Additionally, we completed a series of mortgage financings totaling $288 million at a weighted average rate of approximately 5% and a term of approximately 15 years. This.
This included a $120 million 10 year loan secured by a fixed property industrial park in Edmonton.
A $90 million 25 year loan secured by a 25 year Loblaw land lease at our choice East way Industrial Center.
And the assumption of mortgages totaled totaling $45 million on disposed assets at an average rate of approximately three 4%.
These proceeds were used to repay approximately 82 lane of construction debt and the remainder used for general purpose are reinvested at attractive yields.
I think completed these financings we have limited remaining debt exposure for 2024.
We're also pleased to have received a credit rating upgrade from standard <unk> Poor's to Triple B plus.
Say that the strength of our grocery anchored retail properties, our strategic relationship with loblaw and our commitment to maintaining prudent credit measures as reasons for the upgrade.
Before I conclude I wanted to provide a bit more color on our restructuring costs in the quarter and the impact to our full year outlook.
In an effort to drive operational effectiveness and after thoughtful analysis, we've decided to outsource a portion of the company's operational accounting platform to a third party vendor to create process efficiency and advance the use of technology across our business.
We anticipate that the total restructuring costs for 2024 relates to this outsourcing will be approximately $7 million.
Given the strength of our overall performance this year as well as additional loblaw <unk> income anticipated in the second half of 2024, we do not expect this restructuring to impact our 2024, our financial outlook.
Mario: And with that now rail Niall Aaron and I will be glad to answer your questions.
At this time I would like to remind everyone.
A quick question. Please press Star then the number one when your telephone keypad.
Your first question comes from.
Duane.
Lauren Omar.
Yes.
Yes go ahead.
Thank you very much and good morning, everybody.
Maybe just on the retail side I think this is Dave one of the first times, you've kind of heard.
You guys mentioned, the watch us versus us asking you about the watch list.
Just wondering what types of tenants are these are you know they may be more individual are.
Multiplier ships, what's the appetite for backfill Mike.
Mario: Okay.
Mike: The backfill is quite strong its not.
As we said we have very few tenants on our watch list as most of our tenants are really.
Speaker Change: Necessity based grocery and delight.
It's we're releasing problems around discretionary spending so it's largely big box.
Fashion and power centers.
Small <unk>, where this <unk>, unlike midtown mid priced sit down restaurants, that's where we're seeing some weakness.
But we're monitoring it and as I said, there's not a lot of those in our category.
And just in terms of the back filling side of it like who would you guys be expecting the sort of step in in the event. Some of these went dark.
What type of well contained.
It's more where there is.
Franchisees and Theyre trying to eat our payback debt or sell at their business, but we are replacing with its similar and we don't have challenges, we're using blow loblaw small format and value retailers to backfill as well so we're not having a challenge back selling the real estate.
Okay. That's very helpful. And then maybe just slip into the.
The industrial side of things you mentioned, a couple of non renewals could you maybe quantify.
What you expect.
Act on occupancy and maybe SP NOI to be over the balance of the year from those.
So we expect.
Conservatively, we were looking at around 200000 square feet of potential vacancy, which would put it from about $98 eight maybe down to 90.
97% just under 90 days.
Speaker Change: As we said in our.
Speaker Change: Our notes a lot of this was planned for so we're expecting it and it's included in our outlook.
Okay perfect.
And then maybe just lastly, I think when we last spoke in May real I believe you mentioned you guys were hoping to do about $150 million to $200 million Loblaw transactions.
If that is in fact, if I'm recalling that correctly, how do you sort of see the.
Speaker Change: The balance of the year evolving on that front.
Hello, and thanks for the question. So you are correct.
Probably closer to the 150 number and it will start in Q3, and then some of it may trickle into Q4.
Okay perfect. Thank you everybody so much.
As a reminder, if you'd like to ask the question.
Please press star followed by the number one or any telephone keypad.
Your next question comes from the line of.
Sam Damiani with TD Securities.
Please go ahead.
Thank you and good morning.
I Hope you all can hear me.
Yes.
Yeah.
Speaker Change: So just I guess first question is on the on the industrial.
Development pipeline the two active projects the cost did increase about three 5% quarter over quarter, just wanted to get a little more detail what drove that.
And if the rents didn't change that would change the yields by about 25 basis points.
My math is correct.
Just curious.
I guess what was going on there.
Yes, Sam I don't think its anything significant or it's just really a small increase in.
Say internal.
Allocations interest G&A and then the phasing of the Master plan costs to those phases, but it was minor tweaks I would say.
And the yield is still in line with where we previously disclosed okay. Okay fair enough.
And just I guess on the industrial side are you getting closer to.
Speaker Change: Starting another project.
We started construction on another project, either with or without pre leasing.
No we actively marketing the thoughts I think what's broken nothing comment the brokerage communities.
Please because they see all the activity on our side, we have to say that gardening and they definitely are stalled.
We've got so much work on the thoughts at the moment with all the servicing with a lot more building and with the spec development at the earliest we actually.
In Q1 Q2 of 'twenty five.
And we'll have to assess where the market is then but right now we feel very confident that we should be in a position to come at that time.
Great great.
And.
I tried to catch what youre seeing real on the I guess the deal with nautical lands.
Speaker Change: Can you hear US yes can you hear me fine.
Hello.
Is this better.
Hello.
Hi.
Speaker Change: Did you hear us.
Speaker Change: I did hear you can you hear me.
Now we can we didn't give you after we completed.
Talk about the industrial development Okay.
I know I did hear and into my next question just on the retail side.
It looks like about 160 odd thousand square feet of news active starts in the retail development pipeline year to date and I guess a lot of it is with this nautical lands group and just wanted to clarify you said, there's six sites.
That you're doing with them and.
Just to be clear the ground leases in there what sort of will sort of use as the as the development.
Yes, they building rental communities focused on.
Population segments, 55, and all of that.
Speaker Change: And we view it as very complementary to our sites one of the six ground leases were already transferred.
And yes, that's five will come over the next one to two years.
And these two.
Comparable yields too if you were going to develop ground.
Ground based retail yourself.
And superior yields to that.
These high rise low rise with what sort of projects are they are they are they are doing.
But generally around six story so they're there.
Our mid rise.
Sure.
Barbara basis.
Okay, Great Fantastic. Okay last question for me Mary I think you mentioned you got a mortgage on the choice East way.
Element I didn't quite hear the numbers could you sorry could you just repeat that.
Yes, it was a mortgage.
That concludes my five year mortgage at the 20, <unk> mortgage was up 5% and that just I don't recall the number but it was.
Speaker Change: It was.
The lifestyle.
You don't recall the umbrella.
Sam: $90 million mortgage Sam.
Is the 90.
Choices share or at a 100%.
Sure.
I'm not mistaken that was.
Cost on that was 94 million so that's a pretty good.
But you're pretty good capital.
Sam: Payback.
Yes. This is overall a great deal.
Okay.
Great Congratulations on a good quarter I'll turn it back.
Yeah.
Speaker Change: Your next question comes from the line of Baird.
Baird.
With RBC capital markets. Please.
Speaker Change: Please go ahead.
Thanks, Good morning, I, just wanted to come back to the industrial portfolio again, and maybe can you maybe just expand on some of the commentary from a leasing standpoint, some of the dynamics youre seeing.
Is it taking any longer to get leases done.
Are you offering any sort of concessions or <unk>.
Extended free rent periods or any changes in terms that youre seeing.
Speaker Change: I have only a style no at the moment, we're not offering any concessions.
We're still seeing a lot of interest and.
Yes, I think the value is our.
Place rents at the moment and the uplift.
Our spreads our retention I think what was reflected in the quarter is a good indication of where we finished the year where were getting high retention and strong spreads. So we're not seeing that kind of weakness in our portfolio based on our locations.
Okay, and then just in terms of the some.
Some of the occupancy slippage in the industrial portfolio that you do expect I think later this year.
Which markets, where those and whats your sense of timing of getting that space released.
So the biggest.
Speaker Change: It's probably in the west and it's smaller Bay units, one and a half to 3000 square feet, where it's local operators, that's where we're seeing some weakness.
Speaker Change: And Ontario was as well.
We've got some planned but it's the re leasing of that we've been conservative about our re leasing assumptions, both on res and downtime.
Got it.
Eric can you just come back to your comments on the I think you mentioned some of the factors that need your <unk>.
<unk> 2024 guidance for <unk> pretty much intact, but I think you mentioned in that comment that you expect.
I think some additional income from la Luz portfolio optimization, if I'm not mistaken can you just maybe expand on that.
Speaker Change: Yeah, probably so like in our outlook so the incremental costs from the restructuring.
And then offset by some lease surrender income so.
The second half of the year with the right sizing, we can probably expect about $6 million of lease surrender.
Thank you for all for the third quarter into this.
Speaker Change: Q4, and so when you factor that against the costs our outlook remains the same.
And then I guess, the re leasing or the outlook for those additional properties, where they expect to surrender what is the thinking would be.
Speaker Change: Go forward on those.
We're working we're working through a lot of those leases are already negotiated as we kind of finish out the year.
So as Mario said, we don't expect it to have an impact on the quarter are growing back in at higher rents.
Okay at higher rents got it.
And then just for me.
Capital recycling standpoint, still fairly active I guess from dispositions, what's sort of the outlook for the balance of the year as you think about that pipeline.
Yes, I think what we said.
Call. It two years that we again very focused on trying to be balanced.
Expectation is that the dispositions would be very close to the amount of acquisitions of additional call. It.
Roughly $200 million of acquisitions and $200 million of dispositions.
Thanks, very much Ralph I'll turn it back.
Okay.
The next question comes from the line of.
<unk>.
With CIBC.
Speaker Change: Please go ahead.
Thanks, Good morning, just firstly on the Loblaw industrial leases wondering if the renewal options there are structured the.
The same line as the retail ones that what was the lift on.
Industrial versus retail in that $8 four average spread that you achieved in the quarter.
We had one industrial.
The spread was 10%.
Okay.
And then I guess looking at the police are now, let's say you have now.
About half of next year's maturity so for any of those third party leases that roll next year.
Are you finding that leasing spreads are holding in the high single digit range or where are they landing.
Correct I agree.
Okay.
And then just lastly around maybe any updated commentary on the transaction market if youre seeing the buyer pool has changed.
Speaker Change: Largely local private and just thoughts around.
The availability of financing with the group that you use they transact with us.
Yes look I think it's very similar to what it was last quarter.
Speaker Change: <unk> continues to be this big bid ask spread.
And between sellers' expectations, and what buyers are willing to pay.
Have been able to transact.
Because as you said, we are more focused on that private market and given the quality of the assets and the tenancies generally in place they are able to get financing and in a few cases, we've given.
Btb's, but they're not significant amounts of atvs.
To help bridge.
Speaker Change: The.
The purchase that for a short period of time.
Okay, and well look at the average term on the Btb's you have.
Generally one year.
Okay.
Okay. Thank.
Thank you.
I would now like to turn the call back over to real.
Grill Diamond CEO.
For closing remarks. Please go ahead.
Thank you Eric and thanks to everyone for your interest your investment in choice and for joining US. This morning Hope you all have a great weekend.
This concludes today's call. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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Sure.
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