Q3 2024 CT Real Estate Investment Trust Earnings Call
Today. At this time, I would like to welcome everyone to CT-REAT Q3, 2024, earnings results conference call.
All lines have been placed on YouTube or any background noise.
After the speakers remark, there will be a question and answer session. If you would like to ask a question during that time, simply press star 1-1 on your telephone keypad. To withdraw your question, please press star 1-1.
Speaker Change: The speakers on the call today are Kevin Salsberg, President and Chief Executive Officer of CT-Ready. Jodi Shpigel, Senior Vice President, Real Estate and Lesley Gibson, Chief Financial Officer.
Speaker Change: Today's discussions may include forward-looking statements, such statements are based on management 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.
Speaker Change: Please see CT Reads Public Filing for a discussion of these risk factors, which are included in their 2023 Management Discussion and Analysis, and 2023 Annual Information Form, which can be found on CT Reads website and on CTR+.
Speaker Change: I will now turn the call over to Kevin Salsberg, President and Chief Executive Officer
Kevin Salsberg: Thank you, Jj. Good morning, everyone, and welcome to CP3rd Quarter Investor Conference Call.
Kevin Salsberg: I'm pleased to report that Q3 was once again a healthy and stable quarter for CP-REAP.
Kevin Salsberg: will provide the details, but at a high level our occupancy, renewal spreads, pale ratio and credit metrics.
Kevin Salsberg: We're all relatively in-line with our results from the past few quarters.
Kevin Salsberg: Growth once again was strong with NLI increasing by 3.4% and AFFO per unit increasing by 2.3% in the quarter.
Kevin Salsberg: In the external environment, the recent rally in read equities has helped to narrow the gap in terms of discounts to net asset value.
Kevin Salsberg: In addition, the pace of re-cuts by the Bank of Canada, including the most recent outside reduction, continues to drive interest back to the real estate sector as the benefits of alternative yield opportunities for investors narrow on a risk adjusted basis.
Kevin Salsberg: Although transaction volumes remain low by historic standards, it is hoped that these recent moves will provide a catalyst for market participants to begin to re-engage and seek out new investments.
Kevin Salsberg: For CT-REAT, we were pleased to announce $85 million of new investments this quarter, which will help bolster our strong pipeline of projects.
Speaker Change: Between now and the end of 2025, we intend to deliver over half a million square feet of new development projects.
Speaker Change: And as mentioned on previous conference calls, we continue to monitor the market and seek out differentiated and strategic opportunities for CT-read. So that's just a $47 million acquisition of a Canadian-Tire Markstore property in a NIMOBC that closed in the quarter.
Speaker Change: We also sold an out parcel to a multi-tent property in a really Ontario post-quarter and for $4 million. To remind listeners, we bought the earliest, the earliest square property from a third party in Q4 2017.
Speaker Change: At the time of acquisition, this roughly 320,000 square foot asset was only 61% occupied and anchored by a no-frills and a 62,000 square foot Canadian tire store.
Speaker Change: Over the last several years, we have relocated an expanded the Canadian tire store, which now occupies over 125,000 square feet of GLA. Backfield, the old Canadian tire store with marks, sports check and dollar ram stores, as well as a new shoppers drug mart that will be opening by the end of Q-1225.
Speaker Change: We have also extend the lease with no-fills and occupancy for this center now sits at approximately 90%.
Speaker Change: By selling the outparsal for double what we pay for this portion of the site, we have sold a non strategic part of this asset and reduced our cost based in the process. This project is a great success story for the REIT and shows how we can leverage our relationship with Canadian Tire to create value in our real estate.
Speaker Change: We are fortunate to continue to benefit from our strong and stable portfolio of assets.
Speaker Change: Our unique relationship with Canadian Tire and the development pipeline that comes alongside this privileged association and continue to seek out new acquisition opportunities that fit our strategy with market conditions allow for it.
Kevin Salsberg: I will now turn it over to Jodi and Lesley to provide some additional details on the quarter, our results in our investment leasing and development activities. Jodi. Thanks Kevin and good morning everyone. As highlighted in our press release yesterday, we replaced two announced three new investments this quarter.
Speaker Change: These new investments relate to the vending of a newly built property containing Canadian entire marks and dollar amnestyres in Monttrombont, Quebec, and a vending of a Canadian tire store in Winnipeg, Manitoba, as well as an expansion of a Canadian tire store located in Pentectin, British Columbia.
Kevin Salsberg: These new investments totaling $85 million are expected to earn a going in yield of 6.2% and will add approximately 283,000 square feet of incremental GLA to our pipeline of projects and our high quality asset portfolio.
Speaker Change: As Kevin previously noted in Q3, CQ-3 completed the previously announced third party acquisition of a property containing Canadian tire and markstores in the NIMO British Columbia.
Kevin Salsberg: for an investment of $47 million adding $141,000 square feet of incremental GLA to the portfolio.
Kevin Salsberg: Our development activities remain strong with 20 projects at various stages of development.
Kevin Salsberg: Two of which are expected to be completed this year and the remaining projects expected to be completed in 2025 and 2026.
Kevin Salsberg: These developments represent a total committed investment of approximately 319 million upon completion, 102 million of which has already been spent and 114 million of which we anticipate will be spent in the next 12 months.
Kevin Salsberg: Once built, these projects will add a total incremental GLA of approximately 769,000 square feet to the portfolio, nearly 95.2% of which has been pre-leased at 4th-end.
Kevin Salsberg: At the end of the quarter, CT-reed maintained its 99.4% occupancy rates, representing a portfolio that is substantially fully least, a true indication that the quality and strength of our assets.
Kevin Salsberg: Year-to-date, we have completed 4 Canadian-tire store-lease extension, and as at the end of Q3, the weighted average lease term for our portfolio was 7.8 years, which remains one of the longest in the sector. With that, I will turn it over to Lesley to discuss our financial results.
Lesley Gibson: and Good Morning Everyone. As Kevin highlighted, we replaced with a result delivered by the seat again this quarter.
Speaker Change: St. St. Anowag, or 1.2% or 1.3 million dollars. Drivers of the St. Anowag increased, were contractual rent escalations of 1.6 million, primarily being the 1.5% average annual rent escalations, including the Canadian tire leases.
Speaker Change: Partly offset by decrease in the proper operating recovery, which are reduced and aw wide by 370,000 in the quarter.
Speaker Change: St. property and a wagger 1.8% or $2 million compared to the prior year. The sink race was primarily due to the increase in St. St. and a wagger 1.8% as well as an increase of 666,000 from the intensifications completed in 2023 and 24.
Kevin Salsberg: Overall, in the third quarter, NOI grew by a healthy 3.4%, or $3.7 million, driven by the increase in same-property NOI, as well as the acquisitions and completion of development projects in 2023 and 2024.
Kevin Salsberg: In the third quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.2%, which was lower than the same period in the prior year of 2.9%.
Kevin Salsberg: This decrease was primarily due to the timing of the Deferred Income Tax Provision amounting to $417,000, which is expected to reverse over the balance of the year.
Kevin Salsberg: The fair value adjustment of $17.7 million in the quarter was driven by a combination of contractual rent increases within the property portfolio, as well as a modest gain recognized from the portion of a property sold subsequent to quarter end.
Kevin Salsberg: Investment metrics for the portfolio remain unchanged relative to Q2 of 2024.
Kevin Salsberg: In the quarter, diluted FFO per unit was up 1.2% to $0.331 compared to $0.327 in the third quarter of 2023.
Kevin Salsberg: This growth can be primarily attributed to the acquisition, intensifications, and developments completed during 2023 and 2024, as well as the contractual rent escalations in our Canadian Tire leases.
Kevin Salsberg: partially offset by higher interest costs related to the debentures issued in Q4 of 2023 and the impact of higher rates on our line of credit.
Kevin Salsberg: and Jodi Shpigel.
Kevin Salsberg: In addition, the straight lining of the base rents included in FFO related to the Canadian Tire Store leases from IPO reached their inflection point at the beginning of 2023.
Kevin Salsberg: Prior to this period, the straightlining has served to contribute to FFO growth. However, more recently, this has detracted from FFO growth and is expected to continue to do so through the end of the initial lease terms for the next many years.
Kevin Salsberg: Growth in AFFO per unit on a diluted basis was strong for the same reasons, though it excludes the impact of straight-line rents, which is not included in AFFO, and came in at $0.308, up 2.3% compared to Q3 of 2023.
Kevin Salsberg: Cash distributions paid in the quarter increased by 3.0% compared to the same period in the previous year due to the increase in monthly cash distributions paid in July 2024.
Kevin Salsberg: AFFO payout ratio for Q3 was 75.0%, which is in line with the same period last year of 74.8%.
Kevin Salsberg: During the third quarter, our unit price rallied, and as a result, we slowed the repurchasing of units through our NCIB facility, buying back approximately 486,000 of units at an average price of $13.20 per unit.
Kevin Salsberg: Turning now to the balance sheet, our interest coverage ratio was 3.52 times to the current quarter, compared to 3.71 times to the comparable quarter in 2023.
Kevin Salsberg: with the decrease mainly driven by an increase in interest expense and other financing charges outpacing the growth in EBIT fair value again this quarter.
Kevin Salsberg: The indefiniteness to EBIT fair value ratio improved to 6.61 times, down from 6.83 times in Q2 of 2023, primarily because the growth in EBIT fair value outpaced the slight increase in indefiniteness.
Kevin Salsberg: Our indebtedness ratio was down slightly to 40.7% from 41.1% in the same quarter of last year due to the increase in fair value on investment properties, partially offset by the issuance of the Series I Senior Unsecured Debentures.
Kevin Salsberg: Our indefinite ratio continues to be within our target range, and considering the current macroeconomic backdrop and interest rate environment, we're pleased with the strength of our balance sheet.
Kevin Salsberg: Lastly, with respect to liquidity, we ended Q3 with $5 million of cash on hand, $291 million remains available through our committed credit facility, and a further $300 million is available on our uncommitted facility with Canadian Tower Corporation.
Kevin Salsberg: And with that, I will turn the call back to the operator for any questions.
Speaker Change: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then one one on your telephone keypad. To withdraw your question, press star then one one again.
Speaker Change: We ask that you please limit yourselves to one question and one follow-up question. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question comes from the line of Lorne Calmar from Desjardins Capital Markets.
Lorne Calmar: I wanted to focus in on the pickup and the investment activity in the quarter, and more specifically on the vend-ins. I was just wondering if you could give a little bit more precise timing on the closing and the value of those two assets and how you expect to fund them.
Speaker Change: Hi Lauren, just a little color and then I'll pass it over to Jodi for some specifics.
Speaker Change: You know, we are fortunate to have a number of different growth levers that we can pull at different times, obviously.
Speaker Change: for a couple years there we were
Speaker Change: adding quite significantly to our development pipeline, which we continue to work through and deliver. Last quarter, we announced and closed this quarter the third-party acquisition, and this quarter, leading into the vendons, a little bit more fulsomely, which I believe is the first time we've
Speaker Change: We've picked up Avendan in about three or so years, so fortunate to have those growth options. Jodi can give the specifics on the properties.
Jodi Shpigel: Good morning, Lauren. So the Winnipeg is a stand-alone Canadian tire store, and it's been on the list of the vending pipelines for some time, and so the opportunity arose, so that's why that one has worked out. And Mont-Tremblant is a newly built shopping centre in Tremblant, built by C-Trail Canadian Tire.
Speaker Change: They have built the Canadian Tire, the Marks and the Dollarama, and so now that it's fully built we are vending that in to us. Both of these are expected to close in the fourth quarter, and the combined value of these is approximately $70 million.
Speaker Change: Okay, perfect. And then maybe just as a follow-up, do you, how do you kind of see the investment activity evolving maybe over the next four quarters? Do you expect it to lean more vendons or kind of stick to the development pipe, building up the development pipeline?
Speaker Change: I mean 2025 will be a big year for us in development completions. As Jodi mentioned, there's probably over a hundred million dollars to be spent on our previously announced activity. I think the acquisition activity you've seen last quarter, this quarter,
Speaker Change: Is us sort of feeling better about the more constructive backdrop? Obviously, cost of financing seems to have...
Speaker Change: settled a little bit more fulsomely. Our unit price had a nice run-up over the last three or four months. Obviously, acquisitions will be opportunistic for us, especially third-party acquisitions, but we're going to be busy over the next 12 to 18 months.
Speaker Change: with our existing pipeline and what we've announced.
Speaker Change: Okay, great. And I'm sorry, I just realized I forgot to get one answer on the first part of my question. How do you guys fund the vendants?
Speaker Change: Lauren, the the vendons are the ones that Jodi spoke about, largely cash. There'll be a small amount of Class B units that are also issued in connection with those, but the majority of those will be cash.
Speaker Change: Okay, fantastic. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Gaurav Mathur from Green Street.
Speaker Change: Hey, good morning, guys. It's Fred. Just one question for me. You have these ventures coming due. I was wondering if you could give us a bit more color on what you're seeing for the $200 million coming due next year.
Speaker Change: Sure, thanks, Fred. Yeah, we have 200 million of public debentures that come due in June of 2025. Obviously, those are on a radar screen, but you know, it's still.
Speaker Change: It's still a fair ways away for us. We're obviously looking at rates given where the interest rates are going and political things are moving. We do have a bit of time to decide what we're going to do. I think our still primary
Speaker Change: you know, primary desire would be to refinance those into the public markets. We're happy to have, you know, the size of program that we have for our debentures, but we'll be making sort of some of those calls over the next quarter or two as we get a bit closer to the maturity.
Speaker Change: Thank you. Bye.
Speaker Change: Canadian star store count has reduced over the last two years. When you look specifically at your views on external growth, how do you think this will impact your acquisition pipeline going forward?
Speaker Change: I know your focus will be on development next year, but just purely looking at your acquisition pipe.
Speaker Change: Yeah, I mean, my take on Canadian Tire is the number of stores they have out there has pretty much remained flat for some time.
Speaker Change: Having said that though, they've been expanding stores or relocating to bigger locations.
Speaker Change: So their total footprint has actually grown and we've certainly been a beneficiary.
Speaker Change: of that, and that's what's led to the development activities we've undertaken.
Speaker Change: over the last few years in our current development pipeline. So I think there's still opportunity there.
Speaker Change: It's a big fleet that they have that they modernize and update over time, which again provides us with that access to pipeline, and we complement that with...
Speaker Change: try to get back to what is the new normal. So, hopefully that answers your question, but I think there's lots of opportunity working with Canadian Tire and hopefully some new things we can do externally as well.
Speaker Change: No, that's great. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: and Jodi Shpigel.
Speaker Change: and Jodi Shpigel.
Speaker Change: Our next question comes from the line of Himanshu Gupta from Scotiabank, Scotia Capital.
Himanshu Gupta: Thank you and good morning.
Himanshu Gupta: So just looking at same-store NOI growth, you know, same-store NOI growth was tracking two and a half percent.
Himanshu Gupta: in the last two years and obviously you know this year tracking less than two percent so how should we think about you know same story and why next year and in general you know the road hop look
Speaker Change: Oh, hi, Himanshu.
Speaker Change: Thank you.
Speaker Change: A couple of things I guess on the same-store NOI growth for the current quarter. We did have a few, some higher non-recoverable property costs, particularly at our enclosed mall properties, where we do have some gross leases and some caps in some of the leases there. But probably the other factor that is impacting the same-store NOI growth
Speaker Change: It's a contribution that we recover from our maintenance capital, so the amortization and also the related interest carry.
Speaker Change: in a flat interest rate environment, like quarter for quarter, that had typically provided us about 50 to 60 basis points of NOI growth.
Speaker Change: And obviously now that we're in an interest rate environment that's going, you know, that's on a decreasing, you know, the interest carry is much less. And the combination of that really is now providing us less than 10 basis points.
Speaker Change: When the prime rate is decreasing, I would expect that to continue until we get to a point where the prime rate stabilizes, and then that growth would typically resume after that point.
Speaker Change: So that's obviously impacting things a bit more negatively as we've had sort of swings in the interest rate and will probably for a few more quarters when we go quarter over quarter comparisons.
Speaker Change: Thank you.
Speaker Change: Okay, so, you know, fair to say that next year likely to track like less than 2%, kind of similar to what we have seen in the recent quarters?
Speaker Change: To make sure, we don't really provide guidance on the future, but mathematically, when the interest rates are going to be less this year than they were in the comparative, that number will be less than it is, so lower growth for us.
Speaker Change: for a couple of quarters, really, until that quarter-over-quarter stabilizes.
Speaker Change: Okay, fair enough. Yeah, thanks for that. And then on Canada Square, should we expect any more incremental NOI erosion, you know, next year? I'm talking 25 versus 24.
Speaker Change: Um, can we ask you, uh, I'd say the amount.
Speaker Change: is going to be really small. There are a few tenancies left at our 2200 Yonge Street property, which is probably at the very north end of our property, which is part of the first phase that will be redeveloped. So I would say there will be nothing significant, no material change in that for the next few quarters.
Speaker Change: Okay, thank you.
Speaker Change: Okay, fantastic. Last question, I think Fred asked about the debentures. I'm asking about the Class C units. I think there's some Class C units expiring next year. Any thoughts on the interest rate there?
Speaker Change: https://www.kenhub.com
Speaker Change: Sure. Yeah, we do have 252 million of Class C units that roll over at the end of next May in 2025.
Speaker Change: You know, they do follow a slightly different process. As Canadian Tire, who owns, who holds those debentures, they do have the opportunity to redeem them or can decide whether they'd like to roll them over. Typically, in the past, they have rolled those units over, but there is a process and a timeline sort of laid out in those Class C, like in the agreements.
Speaker Change: that have sort of a timeline as to when they have to provide us notice as to what they'd like to do and it will flow from there. So we'd have some more information on that probably at our year-end call as to what Canadian Tire would like to do or what the process will be for those Class C units.
Speaker Change: And is there an option or a provision in the agreement where they can convert Class C into Class B?
Speaker Change: There is Manchu, so Canadian Tire does have the opportunity, they could ask to redeem those units and they can redeem them for cash or they can redeem them for Class B units so they do have some options for that.
Speaker Change: and Jodi Shpigel. Thank you.
Speaker Change: Okay, thank you guys. I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Sam Damiani from TD Cowen.
Sam Damiani: Thank you, good morning. Don't have a lot of questions left but maybe I'll just chime in on on Canada Square. Just wondering if you if you have some visibility on commencing active
Speaker Change: are redevelopment there and related to that just with all the changes.
Speaker Change: in Rental Development in Toronto, is there, would you say, like a clearer path to sort of economic justification of building rental on that site, or is the residential component
Speaker Change: going to be mostly condos.
Speaker Change: The residential was always contemplated to be an apartment or rental. If you'll recall, we have a very long-term ground lease that we sit on here at Canada Square, so there is a small portion of the site that we can convert to freehold and potentially do condominiums, but that would be a much
Speaker Change: later phase of the project, so, you know, the new policies that are...
Speaker Change: coming into play federally, provincially, municipally, certainly are providing a little bit of help and support for the development of new residential. As we've talked about in the past, we can't really...
Speaker Change: Get out that density until Metrolinx departs.
Speaker Change: a portion of the site where we are contemplating building the first.
Speaker Change: Towers
Speaker Change: and there's still no timeline in sight.
Speaker Change: Unfortunately, I feel like I say this every quarter, but, you know, for them to complete.
Speaker Change: the project and ultimately the part, the lands that we need.
Speaker Change: Having said that, we are still working with the City, Oxford as our development partner, to advance the master plan and the zoning and related entitlements.
Speaker Change: That process is going well, but obviously it takes time.
Speaker Change: and continues to follow a wholesome process.
Speaker Change: where we engage with stakeholders and city staff to try to do all the things that are required to affect the changes. So everything's going fine, it's just obviously slow, and certainly we anxiously await
Speaker Change: being able to travel east and west along Eglinton on a new subway line.
Speaker Change: Yeah, I'll present there. Okay, that's helpful. Thank you. And I did forget about the the rental focus of that process. So thank you for reminding me. So just on on retail leasing spreads, I jumped on the call a little late, so I may have missed it. But if you have any leasing spreads to update us with.
Speaker Change: in the third quarter, that would be adventurous.
Speaker Change: Good morning, Sam. It's Jodi. You didn't miss the answer to that, so you're asking for the first time. This quarter, the leasing renewal volume was pretty low. As you know, each quarter is a bit different. This one happened to be lower volume than typical. However, we did achieve mid-teen spreads in the renewal, so we're quite pleased with that result.
Speaker Change: Thank you.
Speaker Change: I guess how many square feet would that be, Jodi? That sounds like a great number, but if it's on, like, you know...
Speaker Change: 22,000 square feet. I don't know, is it still a decent sort of sample or is it really? I would say that it would not be a statistically significant sample.
Speaker Change: So yes, it is a smaller GLA.
Speaker Change: Thank you.
Speaker Change: Thank you for that. And just back to, I believe, maybe Lauren's question just on the vend-ins, a small bit of Class B issuance to come there. How would those units be priced?
Speaker Change: They're priced at a VWAP at the closing date.
Speaker Change: Got it.
Speaker Change: to the public unit. Good. Okay. Thank you. I'll turn it back. Thank you.
Speaker Change: Thank you. As a reminder, please press star then 11 on your telephone keypad. To withdraw your question, simply press star then 11 again.
Speaker Change: Our next question comes from the line of Pami Berg from RBC Capital Markets.
Pami Berg: Thanks. Good morning. Just maybe one question for me on the development pipeline. It looks like costs went up a little bit on a per square foot basis. Can you just remind us what sort of range you're expecting on these projects, either, you know, maybe the deliveries for next year or on an overall basis? And just curious how that compares to the, you know, the acquisition, you know, that you quoted in the release.
Speaker Change: Thanks.
Speaker Change: Sure, Bonnie. I assume you're talking about kind of return metrics for those projects that will be delivered.
Speaker Change: If you recall, the way we fund our development of Canadian Tire is they actually undertake the construction activities, take the construction risk, and at the culmination of the project
Speaker Change: We reimbursed them, those funds, through a tenant allowance.
Speaker Change: and then rent begins. So we definitely take the development and construction risk off the table, but obviously the returns.
Speaker Change: are commensurate with the acquisition of a stabilized asset as a result. So,
Speaker Change: I don't have the number offhand specifically for what the next 12-month deliveries would yield, but I would suggest they would approximate what our average has been or what an acquisition of a Canadian Tire Store or a Vendin would look like for us.
Speaker Change: okay so somewhere in the call it six to six and a half percent range
Speaker Change: I was thinking somewhere plus or minus six and a half, yeah, mid and mid sixes.
Speaker Change: Great. Thanks very much. I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: As there are no further questions at this time, I will turn the call over to Kevin Salsberg, President and CEO, for closing remarks.
Kevin Salsberg: Thank you, Gigi, and thank you all for joining us today. We look forward to speaking with you again in the new year in February after we release our Q4 results. Have a good day.
Gigi: This concludes today's call. You may now disconnect.
Gigi: Sam Damiani, Lesley Gibson, Kimberley Graham Sam Damiani, Lesley Gibson, Kimberley Graham, Lesley Gibson,
Gigi: www.mytrendyphone.co.uk
Gigi: Thanks for watching.
Gigi: Sam Damiani, Lesley Gibson, Kimberley Graham Sam Damiani, Lesley Gibson, Kimberley Graham, Lesley Gibson,
Speaker Change: Thank you.
Speaker Change: Angie, Jodi Zeke, Carly Metallica, D Madwood Featuring Bill Congress
Speaker Change: Fansubs by PewDiePie
Speaker Change: Anthem
Gigi: Music
Speaker Change: How've you been? I'm good. How've you been? I'm good.
Gigi: Good morning. My name is Gigi and I'll be your conference operator today. At this time, I would like to welcome everyone to CT REITS Q3 2024 Earnings Results Conference Call.
Gigi: All lines have been placed on mute to prevent any background noise.
Gigi: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star 1 1 on your telephone keypad. To withdraw your question, please press star 1 1.
Speaker Change: The speakers on the call today are Kevin Salsberg, President and Chief Executive Officer of C.T. Reid.
Gigi: Senior Vice President, Real Estate, and Lesley Gibson, Chief Financial Officer.
Gigi: Today's discussions 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.
Gigi: Please see CT REITS public filings for a discussion of these risk factors, which are included in their 2023 Management Discussion and Analysis and 2023 Annual Information Form, which can be found on CT REITS' website and on CDAR+.
Speaker Change: I will now turn the call over to Kevin Salsberg, President and Chief Executive Officer of C.T. Reid.
Kevin Salsberg: Thank you, Gigi. Good morning, everyone, and welcome to C.T. Reid's third-quarter investor conference call.
Kevin Salsberg: I am pleased to report that Q3 was once again a healthy and stable quarter for CT REAP.
Kevin Salsberg: Lesley and Jodi will provide the details, but at a high level are occupancy, renewal spreads, payout ratio, and credit metrics.
Kevin Salsberg: We're all relatively in line with our results from the past few quarters.
Kevin Salsberg: Growth, once again, was strong with NOI increasing by 3.4% and ASFO per unit increasing by 2.3% in the quarter.
Kevin Salsberg: In the external environment, the recent rally in REIT equities has helped to narrow the gap in terms of discounts to net asset value.
Kevin Salsberg: In addition, the pace of rate cuts by the Bank of Canada, including the most recent outsized reduction, continues to drive interest back to the real estate sector as the benefits of alternative yield opportunities for investors narrow on a risk-adjusted basis.
Kevin Salsberg: Although transaction volumes remain low by historic standards, it is hoped that these recent moves will provide a catalyst for market participants to begin to re-engage and seek out new investments.
Kevin Salsberg: For CTREIT, we were pleased to announce $85 million of new investments this quarter, which will help bolster our strong pipeline of projects.
Speaker Change: Between now and the end of 2025, we intend to deliver over half a million square feet of new development projects.
Speaker Change: And as mentioned on previous conference calls, we continue to monitor the market and seek out differentiated and strategic opportunities for C.T. Reid, such as the $47 million acquisition of a Canadian Tire and Mark Store property in the NIMO BC that closed in the quarter.
Speaker Change: We also sold an out parcel to a multi-tenant property in Orillia, Ontario, post-quarter end for $4 million. To remind listeners, we bought the Orillia Square property from a third party in Q4 2017.
Speaker Change: At the time of acquisition, this roughly 320,000 sq. ft. asset was only 61% occupied and anchored by a no-frills and a 62,000 sq. ft. Canadian Tire Store.
Speaker Change: Over the last several years, we have relocated and expanded the Canadian Tire Store, which now occupies over 125,000 square feet of GLA, backfilled the old Canadian Tire Store with Marks, Sporecheck and Dollarama stores, as well as a new Shoppers Drug Mart that will be opening by the end of Q1 2025.
Speaker Change: We have also extended the lease with no frills, and occupancy for this center now sits at approximately 90%.
Speaker Change: By selling the out parcel for double what we paid for this portion of the site, we have sold a non-strategic part of this asset and reduced our cost base in the process.
Speaker Change: This project is a great success story for the REIT and shows how we can leverage our relationship with Canadian Tire to create value in our real estate.
Speaker Change: We are fortunate to continue to benefit from our strong and stable portfolio of assets.
Speaker Change: Our unique relationship with Canadian Tire and the development pipeline that comes alongside this privileged association and continue to seek out new acquisition opportunities that fit our strategy when market conditions allow for it.
Speaker Change: I will now turn it over to Jodi and Lesley to provide some additional details on the quarter, our results, and our investment, leasing, and development activities. Jodi? Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce three new investments this quarter.
Speaker Change: These new investments relate to the vending of a newly built property containing Canadian Tire, Marks and Dollarama stores in Mont-Tremblant, Quebec, and the vending of a Canadian Tire store in Winnipeg, Manitoba, as well as an expansion of a Canadian Tire store located in Penticton, British Columbia.
Speaker Change: These new investments, totaling $85 million, are expected to earn a going-in yield of 6.2% and will add approximately 283,000 square feet of incremental GLA to our pipeline of projects and our high-quality asset portfolio.
Speaker Change: As Kevin previously noted, in Q3, C.T. Reid completed the previously announced
Speaker Change: third-party acquisition of a property containing Canadian Tire and Mark stores in Nanaimo, British Columbia for an investment of $47 million, adding 141,000 square feet of incremental GLA to the portfolio.
Speaker Change: Our development activities remain strong with 20 projects at various stages of development.
Speaker Change: two of which are expected to be completed this year and the remaining projects expected to be completed in 2025 and 2026
Speaker Change: These developments represent a total committed investment of approximately $319 million upon completion, $102 million of which has already been spent, and $114 million of which we anticipate will be spent in the next 12 months.
Speaker Change: Once built, these projects will add a total incremental GLA of approximately 769,000 square feet to the portfolio, nearly 95.2% of which has been pre-leased at quarter end.
Speaker Change: At the end of the quarter, CT REIT maintained its 99.4% occupancy rate, representing a portfolio that is substantially fully leased, a true indication of the quality and strength of our assets.
Speaker Change: Year-to-date, we have completed four Canadian Tire store lease extensions, and as at the end of Q3, the weighted average lease term for our portfolio was 7.8 years, which remains one of the longest in the sector. With that, I will turn it over to Lesley to discuss our financial results.
Lesley Gibson: Thanks, Jodi. And good morning, everyone. As Kevin highlighted, we were pleased with the results delivered by the READ again this quarter.
Lesley Gibson: Same store NOI grew 1.2% or $1.3 million.
Speaker Change: Drivers of the same-store NRI increase were contractual rent escalations of $1.6 million, primarily being the 1.5% average annual rent escalations included in the Canadian Tire leases.
Speaker Change: partially offset by a decrease in the property operating recoveries, which reduced NOI by $378,000 in the quarter.
Speaker Change: Same property NOI grew 1.8% or $2 million compared to the prior year. This increase was primarily due to the increase in same-store NOI noted, as well as an increase of $666,000 from the intensifications completed in 2023 and 2024.
Speaker Change: Overall, in the third quarter, NOI grew by a healthy 3.4%, or $3.7 million, given by the increase in same-property NOI, as well as the acquisitions and completion of development projects in 2023 and 2024.
Speaker Change: In the third quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.2%, which was lower than the same period in the prior year of 2.9%.
Speaker Change: This decrease was primarily due to the timing of the Deferred Income Tax Provision amounting to $417,000, which is expected to reverse over the balance of the year.
Speaker Change: The fair value adjustment of $17.7 million in the quarter was driven by a combination of contractual rent increases within the property portfolio, as well as a modest gain recognized from the portion of a property sold subsequent to quarter end.
Speaker Change: Investment metrics of the portfolio remain unchanged relative to Q2 of 2024.
Lesley Gibson: In the quarter, diluted FFO per unit was up 1.2% to $0.331 compared to $0.327 in the third quarter of 2023.
Lesley Gibson: This growth can be primarily attributed to the acquisition, intensifications, and developments completed during 2023 and 2024, as well as the contractual rent escalations in our Canadian Tire leases, partially offset by higher interest costs related to the debentures issued in Q4 of 2023 and the impact of higher rates on our line of credit.
Lesley Gibson: In addition, the straight lining of the base rents included in FFO related to the Canadian Tire Store leases from IPO reached their inflection point at the beginning of 2023.
Speaker Change: Prior to this period, the straightlining has served to contribute to FFO growth. However, more recently, this has detracted from FFO growth and is expected to continue to do so through the end of the initial lease terms for the next many years.
Speaker Change: Growth in AFFO per unit on a diluted basis was strong for the same reasons, though it excludes the impact of straight-line rents, which is not included in AFFO, and came in at $0.308, up 2.3% compared to Q3 of 2023.
Speaker Change: Cash distributions paid in the quarter increased by 3.0% compared to the same period in the previous year due to the increase in monthly cash distributions paid in July 2024.
Speaker Change: AFFO pair ratio for Q3 was 75.0%, which is in line with the same period last year of 74.8%.
Speaker Change: During the third quarter, our unit price rallied, and as a result, we slowed the repurchasing of units through our NCIB facility, buying back approximately 486,000 of units at an average price of $13.20 per unit.
Speaker Change: Turning now to the balance sheet, our interest coverage ratio was 3.52 times to the current quarter, compared to 3.71 times to the comparable quarter in 2023.
Speaker Change: with the decrease mainly driven by an increase in interest expense and other financing charges outpacing the growth in EBIT fair value again this quarter.
Speaker Change: The indefiniteness to EBIT fair value ratio improved to 6.61 times, down from 6.83 times in Q2 of 2023, primarily because the growth in EBIT fair value outpaced the slight increase in indefiniteness.
Speaker Change: Our indebtedness ratio was down slightly to 40.7% from 41.1% in the same quarter of last year due to the increase in fair value on investment properties, partially offset by the issuance of the Series I Senior Unsecured Debentures.
Speaker Change: Our indefinite ratio continues to be within our target range, and considering the current macroeconomic backdrop and interest rate environment, we're pleased with the strength of our balance sheet.
Speaker Change: Lastly, with respect to liquidity, we ended Q3 with $5 million of cash on hand, $291 million remains available through our committed credit facility, and a further $300 million is available on our uncommitted facility with Canadian Tire Corporation.
Speaker Change: And with that, I will turn the call back to the operator for any questions.
Speaker Change: Thank you.
Speaker Change: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then one one on your telephone keypad. To withdraw your question, press star then one one again.
Speaker Change: We ask that you please limit yourselves to one question and one follow-up question. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question comes from the line of Lorne Kalmar from Desjardins Capital Markets.
Lorne Kalmar: Thanks. Good morning, everybody.
Lorne Kalmar: I wanted to focus in on the pickup and the investment activity in the corridor and more specifically on the vendons. I was just wondering if you could give a little bit more precise timing on the closing and the value of those two assets and how you expect to fund them.
Speaker Change: Hi Lauren, just a little color and then I'll pass it over to Jodi for some specifics.
Speaker Change: You know, we are fortunate to have a number of different growth levers that we can pull at different times, obviously.
Speaker Change: for a couple of years there we were.
Speaker Change: adding quite significantly to our development pipeline, which we continue to work through and deliver. Last quarter, we announced and closed this quarter the third-party acquisition, and this quarter, leading into the vend-ins a little bit more fulsomely, which I believe is the first time we've
Speaker Change: Jodi can give the specifics on the properties.
Jodi: Good morning, Lauren. So, the Winnipeg is a stand-alone Canadian tire store, and it's been on the list of the vending pipelines for some time, and so the opportunity arose, so that's why that one has worked out. And Mont-Tremblant is a newly built shopping centre in Tremblant, built by C-Trail Canadian Tire.
Speaker Change: They have built the Canadian Tire, the Marks, and the Dollarama, and so now that it's fully built we are vending that into us. Both of these are expected to close in the fourth quarter, and the combined value of these is approximately $70 million.
Speaker Change: Okay, perfect. And then maybe just as a follow-up, how do you kind of see the investment activity evolving maybe over the next four quarters? Do you expect it to lean more vendons or kind of stick to the development pipe, building up the development pipeline?
Speaker Change: 2025 will be a big year for us in development completions. As Jodi mentioned, there's probably over $100 million to be spent on our previously announced activity. I think the acquisition activity you've seen last quarter, this quarter,
Speaker Change: Is us sort of feeling better about the more constructive backdrop? Obviously, cost of financing seems to have...
Speaker Change: settled a little bit more fulsomely. Our uniprice had a nice run-up over the last three or four months. Obviously acquisitions will be opportunistic for us, especially third-party acquisitions, but we're going to be busy over the next 12 to 18 months.
Speaker Change: with our existing pipeline and what we've announced.
Speaker Change: Okay, great. And I'm sorry, I just realized that I forgot to get one answer on the first part of my question. How do you guys fund the Bendons?
Speaker Change: Lauren, the the vendants are the ones that Jodi spoke about, largely cash. There'll be a small amount of Class B units that are also issued in connection with those, but the majority of those will be cash.
Speaker Change: Okay, fantastic. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: www.mustwatch.eu
Speaker Change: Our next question comes from the line of Gaurav Mathur from Green Street.
Speaker Change: Hey, good morning guys. It's Fred. Just one question for me. You have these debentures coming due. I was wondering if you could give us a bit more color on what you're seeing for the $200 million coming due next year.
Speaker Change: Sure, thanks, Fred. Yeah, we have 200 million of public debentures that come due in June of 2025. Obviously, those are on our radar screen, but, you know, it's still.
Speaker Change: It's still a fair ways away for us. We're obviously looking at rates given where the interest rates are going and political things are moving. We do have a bit of time to decide what we're going to do. I think our still primary
Speaker Change: you know, primary desire would be to refinance those into the public markets. We're happy to have, you know, the size of program that we have for our debentures, but we'll be making sort of some of those calls over the next quarter or two as we get a bit closer to the maturity.
Speaker Change: Thank you. Bye.
Speaker Change: That's great. Thanks. Maybe one more, if I may. As you know, I mean, the Canadian star count has reduced over the last two years. So when we look specifically at your views on external growth, how do you think this will impact your acquisition pipeline going forward?
Speaker Change: I know your focus will be on development next year, but just purely looking at your acquisition pipe.
Speaker Change: Yeah, I mean, I'll just...
Speaker Change: Having said that though, they've been expanding stores or relocating to bigger locations.
Speaker Change: So their total footprint has actually grown and we've certainly been a beneficiary.
Speaker Change: of that, and that's what's led to the development activities we've undertaken.
Speaker Change: over the last few years in our current development pipeline. So I think there's still opportunity there.