© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Maruyama, and I will be your conference operator today. At this time, I would like to welcome everyone to Choice Properties Real Estate Investment Trust Q2 earnings announcement. [Operator Instructions] I would now like to turn the call over to Adam Walsh, VP and General Counsel. You may begin your conference.
Thank you. Good morning, and welcome to the Choice Properties' second quarter conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer; and Mario Barrafato, Chief Financial Officer.Before we begin today's call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning 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 expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements.Additional information on the material risks that can impact our actual results and the estimates and assumptions we applied in making these statements can be found in the 2018 annual report and management's discussion and analysis, together with Choice Properties' annual information form, all of which are available on our website and on SEDAR.I will now turn the call over to Rael.
Thank you, Adam, and good morning, everyone. Thank you for taking the time to attend our conference call this morning. We are pleased with both our financial and operational results for the second quarter of 2019. At a high level, another solid quarter. Operationally, same-asset net operating income increased by 2% compared to Q1 2019. And period-end occupancy increased to 97.7%. This morning, I'll provide a further update on operational results and transaction activities. Mario will then provide you more detail on our financial performance.Our consolidated portfolio of income-producing assets include 736 properties comprising 68 million square feet of GLA. This high-quality portfolio includes retail, industrial, office and residential properties and is located across Canada with a concentration in Canada's largest markets. This provides the foundation for stable cash flows.Our retail portfolio is primarily focused on necessity-based retail tenants and is anchored by long-term leases with Loblaw, Canada's largest retailer. When we say necessity-based, we mean retailers focused on the sale of everyday goods and services, such as food and personal care items. This asset class is far less sensitive to the ups and downs of the economy and the ever-changing retail environment. This makes it well suited to deliver stability and growth. Period-end occupancy in retail was 97.8%, which is consistent with the prior quarter. We continue to successfully add to our retail property portfolio through development, including a mix of greenfield development and intensifications. Our development initiatives continue to provide us with the best opportunity to add high-quality real estate to our portfolio at a reasonable cost. In Q2, we completed and transferred a total of 115,000 square feet of retail development at a total cost of $33 million. Included in the transfers is a 50,000 square-foot grocery anchored retail site on Rymal Road in Hamilton, Ontario. The site is anchored by 30,000 square-foot No Frills grocery store and ancillary service tenants include a doctor and dentist office.This transaction highlights the competitive advantage of our strategic relationship with Loblaw. The land, originally acquired from Loblaw -- the land was originally acquired from Loblaw, and they are also the anchor tenant for the development. Well-located grocery anchored sites with a strong mix of necessity-based tenants are the backbone of our portfolio. We expect that this relationship will continue to be an excellent source of opportunities in the future. We are diversified beyond retail real estate with industrial, office and residential properties. This diversification allows us to reduce risk, stabilize cash flows and creates more avenues for investment. Our industrial portfolio includes 115 properties and approximately 17.2 million square feet of GLA. The portfolio is concentrated in Canada's largest distribution markets where demand for industrial space by both investors and tenants remain strong.Industrial assets operates under healthy fundamentals with low vacancy rates and increasing rents. Period-end occupancy increased 100 basis points to 98.2%. This was primarily due to the commencement of 125,000 square-foot lease at our recently completed Peddie Road industrial facility.The acquisition environment for industrial properties continues to be extremely competitive. The development is a logical way to add high-quality assets to our portfolio. Incrementally, our development partners continue to provide us with the opportunity to acquire their interest in stabilized assets on an off-market basis.As an example, in Q2, we acquired our partner's 50% interest in 2 industrial buildings at our Great Plains Business Park in Calgary. These buildings were recently completed and stabilized, and this transaction brought our ownership in these assets to 100%. The buildings are new generational, multi-tenant distribution facilities and total approximately 280,000 square feet in our ownership interest. Both assets are fully occupied and have a weighted average lease term greater than 7 years.As mentioned, new generation industrial facilities are extremely difficult to acquire at a reasonable price, so this is a wonderful opportunity to continue to grow our industrial portfolio in strong distribution markets.Next, onto our office portfolio. Our office portfolio is focused on large, well-located buildings in the downtown core of Canada's largest cities. This portfolio is a great example of diversification at work. The fundamentals in most large office markets in Canada, including Toronto, Vancouver and Montréal, are healthy due to a strong economy and robust job growth, whereas office property fundamentals in Calgary continue to be challenging. Our focus in Calgary continues to be proactive, working with existing tenants to complete early renewals and being aggressive in the market on new leasing.We are seeing the impact of this approach. Period-end occupancy for our total office portfolio increased 50 basis points to 92.7% from 92.2% in the prior quarter due to -- due primarily to positive absorption in our Calgary office portfolio.Finally, our residential platform provides an opportunity to further diversify our portfolio. Our focus has been on developing new rental residential assets primarily in the Greater Toronto area. The rental market in the GTA is strong, as limited new supply and robust demand has driven up rents. Our current residential platform includes 4 rental residential assets that are income-producing and another 7 residential assets that are in various stages of development. In total, when complete, these residential projects will represent approximately 1,500 units at Choice's share. This includes over 1,000 units located in the GTA, all of which are in close proximity to major transit. We're excited about the prospects of our residential initiative as a further means of income diversification and another avenue to grow our asset base.That concludes my comments. I will now like to pass it over to Mario to provide an update on our financial performance for the quarter.
Thank you, Rael. Good morning, everyone. I'll begin with a brief overview of our financial results, and then I'll comment on our balance sheet activity.Overall, our 2019 second quarter results were in line with our expectations and reflect the stability and consistency that is inherent in our portfolio. Our reported funds from operations for the second quarter was $170.2 million or $0.248 per unit diluted, down slightly from $0.252 per unit at March 31, as FFO growth from acquisitions and completed development projects were offset primarily by the deleveraging effect of the May 2019 equity offering and $800,000 of nonrecurring charges associated with early repayment of our 2019 debentures. After adjusting for these items, FFO per unit for Q2 would've been just slightly above Q1 2019.Included in our Q2 performance was stable year-over-year growth and same-asset cash NOI. For the quarter, same-asset cash NOI increased by 2% over the prior year. This reflects the annual step rents embedded within the Loblaw portion of our portfolio as well as incremental cash generated from leasing activity.On the leasing front, we had 237,000 square feet of positive absorption primarily from increased leasing activity in our industrial portfolio. This improved our overall quarter end occupancy from Q1 to a strong 97.7% with retail occupancy at 97.8%, industrial occupancy at 98.2% and office at 92.7%.Now on to our balance sheet. Q2 was a very busy quarter from a balance sheet perspective. We completed 2 major capital raises totaling $1.1 billion that significantly improved our balance sheet. In May, we issued approximately 30 million Trust Units in a bought equity deal at a price of $13.15 per unit. This resulted in total gross proceeds of $395 million. This was Choice's first equity offering since the 2013 IPO, and we were exceptionally pleased with the demand especially from both existing and new institutional investors. We were also pleased that George Weston, our largest unitholder, participated in the deal for approximately $50 million. The proceeds from the equity offering were used to repay amounts drawn on our credit facility. This created additional borrowing capacity, providing us with further financial flexibility to fund our active development pipeline.Subsequent to the equity raise, we issued $750 million of unsecured debentures with a term of 10 years at an interest rate of 3.53%. The proceeds were used to repay existing indebtedness, including the redemption of $300 million of unsecured debentures expiring in 2019, $400 million of term loans that arose from the CREIT acquisition. These are variable rate loans that can be repaid at any time with no penalty, and the balance of the proceeds were used for general business purposes. Similar to the equity offering, we were thrilled with the demand for our debt. Investor demand resulted in the optimal size and pricing for 10-year notes.Overall, our financial metrics have improved significantly as a result of these transactions. Using amounts from our proportionate balance sheet, our debt-to-gross book value has decreased to 45% from 47.6% in the prior quarter. Normalized leverage ratios have improved, decreasing to 7.7x as compared to 8.1x in the prior quarter. We improved our weighted average term of maturity which increased from 4.8 years to 5.5 years, and we improved our overall liquidity by increasing the available balance on our credit facility from $1 billion to $1.4 billion. Overall, Q2 was a solid quarter with stable operating results and significant improvements to our balance sheet.I'll now turn the call back to the operator for questions.
[Operator Instructions] Your first question comes from Mark Rothschild with Canaccord.
Rael, you made some comments about being bullish on industrial and with the CREIT industrial portfolio coming into same store. You have guided to the CREIT portfolio having weaker internal growth than the Choice portfolio in the past. With the strength in industrial, would you make the same comment now? Or would the outlook for that portfolio perhaps be stronger than you guys had indicated in prior quarters?
Yes. Mark, thanks for the question. I think the portfolio actually comes into same store next quarter -- next year, I'm sorry, Mark. The portfolio, overall, is performing exceptionally well, particularly in Toronto, where we're seeing 10-plus-percent rent growth. So our comments today would be that the portfolio would have higher organic growth than what we would have probably guided to about a year ago.
Okay. And then for the fair value of your assets, you noted in your disclosure that while there were increases in some areas, you did have a drop in the value of the power centers. Would that have been based on the NOI outlook being weaker, adjusting to cap rate? And maybe also on that note, does it change your view on owning those types of assets in the future?
Mark. Yes, in general, there is an increase in cap rates. And so that kind of is a brush across all that asset class. And then specifically, you might have rental assumptions or capital spending assumptions that would hit the value as well. But it doesn't really change our view on that asset class right now, it performs well. And so would we have taken a hit in the past, and I think things are kind of stable right now.
And Mark, and some of the assets are exceptionally, exceptionally well located. And you couldn't assemble [ land masses ] with surrounding neighborhoods in today's market, so great long-term assets.
But even with the great location of those assets, there still was an increase in the cap rate you're saying?
Yes. And truly, we also rely on third-party appraisers for data points and cap rates, but there was a softening that we saw.
Your next question comes from Sumayya Hussain with CIBC.
Just firstly, on leverage and the improvement there. Any desire to take it down further towards the low 40s level? Or are you guys comfortable to where it's sitting at right now?
Sumayya, we were comfortable before, given the portfolio, the tenant base and the -- and where we are in our development program. But as always, when we see an opportunity where we can improve the balance sheet, we'll take advantage of it, and that's what we did this quarter with getting a chance to get equity, reduce leverage. And consistent with [ kind of maybe ] slowly ramping up our residential program. So we're comfortable now, but if we did have the chance where we can actually get some capital, be it through equity or through recycling and could -- should be part to paying down leverage, I think we would go further but there's no urgency in doing so right now.
Okay. That's fair. And then just moving on to residential development and appreciating that the timing, with the whole pipeline, isn't laid out. But are you able to indicate when the first couple of projects will start to come online and which are the ones that are in the more advanced stages of completion?
Sumayya, it's Rael. The first 2 would be -- the first one would be 390 Dufferin, which started construction, I believe, in Q1 of 2018. We expect that to be stabilized by the end of 2021. And the next one would be our project in [indiscernible] Village, which started construction, I think, in Q3 of 2018. And we expect that one to be stabilized in the third quarter of 2022.
Okay. So a couple of years out. And then just lastly, and probably a question for Mario. I think previously, you've mentioned a normalized annual spending of $90 million to $100 million for maintenance and leasing CapEx. And just at the halfway point here, it's tracking quite a bit lower. Is that just chalked up to just timing of expenses? And should we just kind of stick with the range you've given to us before?
So right now, it is -- it does track more to the back end of the year just due to timing. So right now, I think it's normal for this period. But longer term, I think right now, given where we are as far as doing our reviews and advancing some of the process, we're probably not going to hit that number. I can probably provide more color like next quarter, but we'll probably actually be between $10 million to $15 million lighter right now maybe a bit more.
Your next question comes from Pammi Bir with RBC Capital Markets.
Just in terms of the multifamily development pipeline, any update there on other projects that could be added to that pipeline? If it's sitting at, call it, $0.5 billion today, where do you see that moving over the next, call it, 1 to 2 years?
Hey, Pammi, it's Rael. We've been actually working through that right now. We'll provide you an update when we have more to report. But as we said, we have 7 projects in various stages of development, and we're very excited about the prospects of those projects.
Okay. And just looking at the current platform where the balance sheets sits from a leverage standpoint, how much development are you comfortable adding to the balance sheet today?
Right now, in the near term, I tend to -- I think I see us -- we're spending about $200 million a year. So that will take us probably to, say, $600 million on our balance sheet maybe as we get going, and we probably can go a bit higher. We have scale. And I think as we -- we have the liquidity. And as long as -- with things like this equity offering we just did and some capital recycling, we can kind of balance the debt and the equity to not put strain on the balance sheet.
That's helpful. Just one last one, in terms of the 50% stake on the land sold in Brampton, and I think it was for $15 million, can you comment on what's the intent there and what's happening at that site?
So we had originally contemplated a target eco-development over there. And obviously, with the change in target's plans, we were able to rezone the land and sold it to Daniels, and they're going to be doing a townhouse development. So we've retained -- sorry, we've also retained, I forget how many acres of land. One of the portions of land, we're going to be doing rental development with Daniels. And then, we have, I believe, 8 or 10 acres still left for retail development.
Okay. So this is a very -- I guess you don't have any -- you have density figures yet or still going through that process?
On the Daniels land, we don't have their figures. On the Choice land, we are building, I think, about a 270-unit rental building with Daniels and, I believe, they're 90 condo units.
Sorry, one last one. Just coming back to the fair value change in the quarter, realize this is a rather minute, but from an overall -- or from the composition of that change in the quarter for the investment properties, do you have that handy in terms of what the change was for the retail and the office assets?
No, I don't have the numbers in front of me, Pammi. But effectively, just Vancouver office, we're seeing increase in rents. The market's getting -- it's very hot there, so that's where you had your increase and then the discretionary retail was the downside. It's pretty that simple, it's pretty simple from valuation point of view.
[Operator Instructions] Your next question comes from Sam Damiani with TD Securities.
Just wanted to ask about the development spending budget for the next 2.5 years. Is the schedule in the MD&A? Looks like the residential spend has reduced a little bit. Is that because some projects are being delayed or the construction time is being extended? Can you just give a little bit of color as to what prompted that?
Yes. Sam, it's Rael again. What prompted it is, as we've gone through the planning of some of these projects, on 1050 Sheppard Avenue, and there was a slight delay in timing because we landed up squaring up the building a little bit which made the units in the building so much better. And then on the projects I was mentioning earlier on the Brampton land, originally, we had contemplated entrance to our site off a private road that Metrolinx owns. We had to change the design, as we couldn't come to an agreement with Metrolinx. But again, we believe that the revised design with the entrance off a public road is a lot better. So that pushed out the timing of those 2 projects further than we had originally contemplated.
Okay. That's helpful. So the Dufferin and the East Liberty, those 2 projects are on track.
Correct.
It's really just these other projects. Okay. That's helpful. I appreciate that. And you mentioned industrial leasing is strong in -- does that include Calgary and Edmonton? What are you seeing there? I know you have spot, you're confident with you buying the asset in Edmonton -- in Calgary, excuse me. But what are you seeing there in terms of momentum? And do you see opportunity to add more development there? And how's the leasing going on your one project underway?
So in Calgary, leasing is very stable, and we will, again, commence construction as we have fully leased the buildings that are -- we'll commence construction on another building, I would think, over the next 12 months. Edmonton is slower. So Edmonton, the leasing has -- we've got one building that is currently under lease-up and demand is definitely slower.
Do you see more opportunities to acquire 50% interest that you don't own in some of those projects out there?
Given our partner, we believe we will acquire their 50% interest once the buildings all stabilize.
Just looking at sort of longer term, I think I've asked on previous calls what's the outlook for some of the stores, the Loblaw stores over the longer term given the changes in the industry. Are you having any discussions with Loblaw with respect to change of use in some of the stores in terms of accommodating fulfillment?
No, we're not.
Your next question comes from Tal Woolley with National Bank.
Eric Kim here, stepping in for Tal. I just had a quick question on your Bathurst in Lakeshore development. It looks like the expected spending rose 38%, kind of, as compared to Q1 but there was no increase in your ownership or your projected GLA there. Could you just provide some details on what drove that revised cost estimate?
Yes. So the costs are actually the same. It was just the presentation. We had previously netted out the condo sale component, which was previously recognized through the P&L. So we are actually now showing the gross cost excluding the condo sale component, which I believe was around $15 million. But the project's 84% leased. Cost are exactly in line where we thought they would be in. It should transfer to income producing mid to late next year.
There are no further questions at this time. I will now turn the call back over to the presenters.
So thank you, everyone, for joining our call this morning. Hope everyone is enjoying the warmer weather and enjoy the rest of your summer. Thanks so much.
This concludes today's conference call. You may now disconnect.