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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Choice Properties Real Estate Investment Trust Q4 Earnings Announcement. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Doris Baughan, Senior Vice President, General Counsel and Secretary. Thank you. Please go ahead.
Thank you. Good morning, and welcome to Choice Properties Q4 2020 conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer; Mario Barrafato, Chief Financial Officer; and Ana Radic, Executive Vice President, Leasing and Operations.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 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 facts.These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the material risks that can impact our financial results and estimates and the assumptions that were made in applying and making these statements can be found in the recently filed Q4 2020 financial statements, and management discussion and analysis which are available on our website and on SEDAR.I will now turn the call over to Rael.
Thank you, Doris. And good morning, everyone. Thank you for taking the time to join our Q4 conference call. We are pleased with both our financial and operational results for the quarter as our portfolio of high-quality real estate continues to produce strong and stable rent collections.By all accounts, 2020 was a challenging year for all of us. The COVID-19 pandemic significantly impacted our communities and our day-to-day lives. In response, we took thoughtful actions to mitigate the effects of the pandemic on our business and continued to focus on the best interests of our employees, tenants and other stakeholders.The uncertainty we experienced in 2020 is continuing into 2021, but we are well positioned to withstand the continued disruption. Our diversified portfolio is well occupied at 97.1% and is leased to high-quality tenants across Canada. The pandemic and the most recent lockdowns have had the most impact on our retail assets. That said, we're in a solid position given our tenant mix as our assets are primarily leased to either grocery stores, pharmacies or other necessity-based tenants who continue to operate.Many of our tenants have found ways to operate at a reduced capacity, whether through delivery or curbside pickup. Those with limited ability to operate who have been forced to close entirely have been most impacted during the recent lockdowns. This includes fitness facilities, dine-in restaurants and some personal service retailers, which represents less than 6% of our overall retail portfolio.Beyond retail, we also have high-quality industrial, office and residential properties in Canada's largest markets. This diversification enables us to further reduce risk and stabilize cash flows. The stability in our portfolio is reflected in our rent collections. For the quarter, we collected over 98% of our rents, which is consistent with Q3. Mario will speak more about collections in a moment.Before Mario discusses our financial results and balance sheet, I want to spend a moment discussing our development and transaction activities. On the development front, our program continues to deliver exceptional assets to our [Technical Difficulty]. There've been no significant delays as a result of the pandemic as both our planning and construction teams continue to make progress on our ongoing projects.For the quarter, we completed and transferred 3 development projects for approximately 183,000 square feet of GLA at our share. This reflects a total development cost of $83 million and includes an office component of our West Block development in Toronto. West Block is a mixed-use development, and the office space includes 160,000 square feet that is 100% leased to Loblaw.In addition to the development program, we continued to be active with our capital recycling program. Since the end of the third quarter, we've completed or entered into agreements to complete $332 million of dispositions and $214 million of acquisitions. I would like to highlight a few transactions.First, on dispositions. We completed the previously announced sale of a 50% non-managing interest in a retail portfolio for $169 million. The portfolio includes 11 grocery-anchored retail assets in secondary and tertiary markets. We also completed the previously announced sale of 2 additional retail portfolios for $107 million, including 3 stand-alone Canadian Tire and 5 assets anchored by Loblaw. Each of these assets are all located in secondary and tertiary markets. Finally, we sold Walker Square Shopping Centre in Windsor for an aggregate sales price of $51 million. The asset comprises of 259,000 square feet and is anchored by Loblaw's Superstore.Recent asset management and leasing activities repositioned the asset to 100% occupancy with longer term -- with longer lease terms, which drove significant value creation and resulted in a sale price above our IFRS value. Collectively, these dispositions [Technical Difficulty] liquidity for our existing portfolio. Overall, we're encouraged by the interest from institutional investors and the strong pricing for our secondary and tertiary retail assets, both of which speak to the high quality of our assets and the advantage of the grocery anchor.Next, on to acquisitions. We completed the previously announced acquisition of an industrial portfolio for $86 million. The portfolio is comprised of 4 cross-dock facilities in vector markets and represents a significant land holding of 56 acres. These assets are 100% leased to a national logistics company with a weighted average lease term of nearly 14 years and with strong [Technical Difficulty].Further adding to our industrial platform, we acquired 6 industrial properties from Weston Foods for $79 million. The portfolio comprises 835,000 square feet of GLA and is 100% leased to Weston Foods with an average lease term of 20 years. The properties are all located in key distribution markets across Canada, with over 65% of the portfolio in the GTA.We also acquired 5 retail assets through [ vending ] from Loblaw for an aggregate purchase price of $46.6 million. This includes 1 multi-tenant asset and 4 stand-alone Loblaw locations, all on long-term leases. Four of the assets are located in the primary markets, including 2 in Vancouver and 1 in Toronto and 1 in Montreal.These acquisitions speak to our ability to generate stable and growing net operating income through acquisitions. They also highlight our strength in sourcing high-quality investment both through existing related parties and off market opportunities.Looking back at 2020, we did over $1 billion of real estate transactions through our capital recycling program, including $288 million of acquisitions [Technical Difficulty] with equity. This activity demonstrates our ability to generate stable and growing net operating income, lower our leverage through equity issuance and improve the overall quality of our portfolio. We expect to continue our capital recycling program into 2021.I'll now 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 rent collections and then speak to our financial results and balance sheet activity.Rent collections for the fourth quarter were stable at 98%, which is consistent with the third quarter. The steady rent collections reflect the combination of our stable portfolio and the effectiveness of rent relief measures which have supported our tenants through these unprecedented times.Continuing with rent collections for the quarter, we've reported a bad debt expense of $3.5 million. The expense reported includes pre-COVID amounts for a national retailer. Excluding this amount, bad [ debt expense ] related to 2020 recurring billings is approximately $2 million, down from $4.7 million reported in the third quarter.In terms of accounts receivable, we have provided disclosure in our MD&A, which accounts for tenant billings in the previous 3 quarters. And from this, you can see that almost all of our [Technical Difficulty] have either been collected, deferred pursuant to deferral arrangements or provided against, leaving only $4 million of exposure, which we expect to recover [Technical Difficulty].Our reported funds from operations for the fourth quarter was [Technical Difficulty]. This was relative -- this was a relatively clean quarter with the exception of the $3.5 million bad debt expense I referred to, being offset by approximately $1 million of nonrecurring lease surrender income.On a per unit diluted basis, our Q4 FFO was $0.239 per unit compared to $0.237 in the fourth quarter of 2019. The increase in FFO per unit for the current period was primarily due to NOI from acquisitions, a reduction in interest expense from rolling down interest rates and lower debt levels, and this was offset by bad debt expense in the current period.Reflected in our per unit amounts is a higher number of units outstanding as a result [Technical Difficulty] last quarter to acquire the West Block development and our head office at 22 St. Clair from Wittington, and units issued this quarter to acquire the Weston Foods portfolio from George Weston Limited.Excluding the previously noted bad debt expense, our operating performance was stable. Quarter end occupancy increased to 97.1%, with retail occupancy at a strong 97.4%, industrial occupancy at 97.3%, and office occupancy at 92.1%. The net increase in occupancy was due to the acquisition of fully occupied assets in the quarter [Technical Difficulty] Weston Foods, partially offset by nominal negative absorption [ in the quarter of 58,000 square feet. ]Same-asset cash NOI for the quarter decreased by 1% year-over-year when excluding the impact of bad debt expense. The decline reflects lower parking and solar revenue and [ one-time ] adjustments recorded in Q4 of last year. This is offset by annual step rents embedded within our Loblaw portfolio.Turning to the balance sheet. For the quarter, we reported an increase to the fair value of our investment properties of [Technical Difficulty]. The increase was related to a combination of realized gains in transaction activity, a revaluation of a parcel of development land that we sold subsequent to quarter end, and improved fundamentals in our grocery-anchored retail and industrial portfolios.We continue to take actions to strengthen our financial position and support our business with an industry-leading balance sheet, evident with the issuance of equity in Q4 to acquire a portfolio of assets from Weston Foods. In total, for 2020, we issued $288 million of equity to acquire strategic assets that increase our net asset value and reduce our leverage.[Technical Difficulty] had very little finance activity in the quarter as the early redemption in the second quarter of 2 of our debentures maturing in early 2021 has left us with no significant debt maturities for September of 2021. Over the course of this past year, we significantly improved our balance sheet by reducing our risk profile and improving our financial capability. This includes extending the weighted average term of debt, lowering our weighted average interest rate and improving our liquidity position.And from a liquidity perspective, we have approximately $1.5 billion available on our credit facility and over $200 million in cash on our balance sheet, giving us ample liquidity, in addition to approximately [Technical Difficulty] of unencumbered assets that we can finance or prune to raise capital.So overall, with our stable portfolio, our active development pipeline, low debt level and high liquidity level, we believe we are well positioned to manage the current challenging environment.I'll now turn the call back to the operator for questions.
[Operator Instructions] Your first question comes from the line of Himanshu Gupta from Scotiabank.
So on the -- just on the fair value gains in the quarter of around $100 million, was the majority of it related to the disposition activity? And just wondering how much was related to the revaluation of the investment portfolio?
So I would say probably over half of it was related to transactions. And that was both the retail properties we sold and the development land that we sold. As far as the remainder, I would say probably $40 million was due to industrial and one was just fundamentals in our GTA market and more the mid-market type product. And also, we had a lease in Québec that once you look at those fundamentals, it created a significant value. So probably -- so half and half between transactions and fundamentals.
Got it. And then if I -- sticking on the valuation subject, I mean looking at the overall cap rates for retail portfolio, it was unchanged sequentially and only up, I think, 9 to 10 basis points on year-over-year basis. I mean, directionally, what are your thoughts going forward? And how is the appetite for stand-alone grocery properties in the market today?
So -- I mean -- we -- we're seeing it now. I mean the value of the long-term lease with an investment-grade tenant, it's becoming evident. And right now, a lot of transactions are geared around that type of assets. So given bond rates where they are today, we just see that asset class becoming more valuable. And it's not reflected right now in appraisals, and we've been the primary source of transactions, and you can see the gains we've reported. So hopefully, we'll see the [Technical Difficulty] narrow that gap.As far as the rest of the portfolio, it really just depends on how we come out of this next phase of the pandemic. And maybe I can defer to Rael as far as what we're seeing right now.
Yes, Himanshu, we've seen lots of interest, as Mario said, lots of interest on necessity-based retail. And then very strong interest in industrial. And in fact, one of our partners is in the process of selling their interest in an office asset that we [indiscernible] with them. And the pricing is a lot stronger than our current IFRS value. So there continues to be lots of liquidity for high-quality assets.
Got it. And then just turning to the rent collection, is a stronger 98% consistent with Q3? How is the collection trending in January and February so far? Any impact you're seeing from the recent lockdowns?
So January, again, it's coming in strong as well. So -- and in February, we're still not done the whole process, but really, it's not so much the past. It's just seeing how our tenants come out of the next phase. But we're pleased. We started at 86%, and I think we're leveling off, and we'll just keep supporting our tenants as best we can.
Okay. So just to be clear, so January is very closer to what you collected in Q4. Is that a fair statement?
That's a fair statement.
Okay. Fantastic. And then just on the collections to OpEx, I mean as per the disclosure, around $4 million is the amount, which is remaining to be recovered, and for which no provision has been made. How do you get comfortable that this amount will be recovered? And by when do you expect to collect that?
For the most part, just the nature of the billings. It's just when you [Technical Difficulty] billings, you have catch up. So we have no reason to suspect they won't be paid. It's just a matter of timing right now. And they come from tenants who've been paying rent otherwise.
Okay. Okay. And maybe just final question on the transaction activity. You bought an industrial portfolio from Western Foods at $79 million or so. What was the cap rate on that? I mean on a dollar per foot basis, looks pretty attractive to me, $100 per foot for the portfolio, which is, I think, 65% in GTA, as you mentioned in your prepared remarks. So anything on the pricing there?
Yes. Look, Himanshu, as you said, on the price per foot, it is attractive. It is long-term leases, and the cap rate is mid-5s.
Mid-5, okay. And how is the pipeline looking for industrial assets? And is there a plan to increase industrial exposure to a certain size or certain percentage of the portfolio?
We don't have a specific target. We are seeing very strong rent growth in industrial. So we would like to increase our exposure to industrial. It's just very hard to find reasonably priced acquisitions, but [Technical Difficulty] trying to source them. And hopefully, we can complete a few acquisitions this year.
Your next question comes from the line of Jenny Ma from BMO Capital Markets.
Congratulations on the volume of deals that you've done. With that in mind, I guess you have a good vantage point to comment on valuation for retail, in particular. Are you seeing spread different -- spread between cap rates for primary and secondary markets? Or is valuation more strongly predicated on the long-term essential retailer anchor? And then in the same vein, do you see a differential between stand-alone boxes versus grocery-anchored centers?
Yes, Jenny, thanks so much for the question. So we actually think all necessity-based retail has really separated itself from other sorts of retail. And we're seeing strong interest regardless of the market. There has always been a pricing differential between, call it, secondary and tertiary markets versus -- and primary, and it hasn't widened, but there's very strong interest for assets provided is that necessity anchor. And in all situations on our dispositions this year, pricing was higher than IFRS value, as Mario pointed out earlier.
Okay. Great. And then my second part of the question was about stand-alone boxes versus grocery-anchored shopping centers. Are you seeing any change in the differential there or any differential at all?
No, no real change.
No real change. Okay. Great. And Rael, I think in your remarks and your letter to unitholders, you talked about additional capital recycling for 2021. Just wondering how to balance that against some acquisition opportunities you're talking about. Do you think that in 2021, based on what we can see now, Choice will be a net buyer or seller of assets?
So in 2020, we were a net seller. We would like to -- look -- we don't look at it on an annual basis. We look at it in total, Jenny. And so things may spill out [Technical Difficulty] different years. We did over $1 billion of transactions this past year. It's probably -- it's going to be tough to do the same level of volume in 2021, but we're continually looking for good investment opportunities.
Okay. Great. And then, I guess, extending that discussion, it looks like there's quite a bit of cash here on the balance sheet, and you're still looking to recycle capital. Just looking at some of the upcoming debt maturities, it looks like it's mostly 1 bond and some mortgages. What is the planned use of cash, I guess? Do you intend to sort of pay down some of the secured mortgages and increase the financial flexibility on the balance sheet? And would it make sense to early redeem the bond that get coming up in September? Or is it just something that you intend to wait out?
Jenny, yes, I think the answer is yes, yes, yes. Hopefully, we can deploy the money. As Rael said, the timing of matching up dispositions and acquisitions didn't coincide. So we'd like to spend the money, but if we're paying down debt, it's not a bad option either. And we will be looking to early redeem if it makes sense. Right now, [Technical Difficulty] pay out a great fee when we don't really -- we have other -- potential other [Technical Difficulty] we'll figure it out. But also we have our development pipeline where we can deploy the money as well. So we have a lot of options, and we're going to kind of wait for a little bit, but it will go to good use.
Your next question comes from the line of Sam Damiani from TD Securities.
Just on the residential development program. You've started construction recently on a couple more projects. Obviously, you're confident in those specifically. Are you as committed to proceeding forth with the new capital in that area given what you're seeing in terms of the impact of the pandemic on the revenue -- market revenues, rents and also construction costs?
So long term, we are bullish. And our investment thesis holds. We will invest in residential. On the construction cost side, we have a huge competitive advantage given our land cost, what we're carrying around on the balance sheet for. So we just have to be mindful that we won't take on too much development at one point in time. And we have to be realistic with our rent expectations.As an example of what's coming online in 2021, [Technical Difficulty] we would expect to increase. And the rents really outperformed our original pro forma. And even today, with the drop in rents, are still exceeding our original pro forma. So we just have to be realistic going into any development, and we're very positive about the 2 developments that we commenced construction recently on.
And what sort of spreads between development yields and stabilized valuation yields are you expecting or targeting on this program? Or these 2 new projects specifically?
So the yields are around 5%, Sam, and cap rates are in the high 3s, I would say, depending on location.
Okay. Great. That's helpful. Rael, you mentioned also the Yonge Street office building that I think you're -- just your partner is selling their interest. And it sounds like the valuation is pretty attractive. You're not tempted to sell your interest as well? And also just curious what the WALT was on that particular building?
So Sam, we like the diversified nature of our portfolio, and that is a very good asset, and it caters to a tenant that is not really competitive with the large blocks of space out of town. And looking at on the weighted average lease term, it wasn't...
It wasn't long, Sam, it was less than 5 years for sure, and there's still leases that are below market, definitely pre-COVID and even post COVID.
And sorry, just one out there. Was that less than 5-year WALT, Ana?
Less than 5, yes. I don't know the exact, but it was somewhere between 4 and 5 years, less than 5.
Okay. Perfect. And just final question on the Loblaw leases. They start to roll in 2023, the retail leases. What do you envision there? Just kind of a few renewals every year? Or do you envision sort of a major, sort of, big portfolio of leases being renewed en bloc as we head over the next year or 2?
Yes. I think, Sam, they're roughly 30 or 40 a year, and we would expect that volume of renewals.
Your next question comes from the line of Tal Woolley from National Bank.
If you look at the Loblaw owned or the Loblaw footprint in the portfolio and sort of stratify their stores into like the market banners, discount banners and the stand-alone pharmacies, do you have a sense from Loblaw whether the pandemic sort of changed kind of the long-term need for the size of those boxes, like whether they might need more size or less going forward?
Tal, it's [Technical Difficulty]. We are in constant communication with Loblaw. We don't want to speak for them, but we're very positive on the portfolio that we own -- the portfolio that we own and we have leases with. We would expect them to -- the stores are performing well, and we would expect them to renew those stores.
Yes. I guess the reason I was asking the question is following up sort of where Sam was going that like there are these sort of 30 to 40 renewals you're facing a year? Like do you expect that like they might, as part of those renewals, might need more space? For things like click and collect and other stock. I just don't know how much of the portfolio is sort of optimized for all of that?
Well, I mean, they are investing in their stores. So we are seeing them install the click and collect. And in some cases, they've been able to accommodate that within the existing footprint, but we don't know of anything material that would suggest that they need more space.
Okay. And then just on the payout. Obviously, not having changed in a while. What sort of conditions would you expect to see where investors could maybe begin to start seeing distributions start to increase again?
Thanks, Tal. It's a good question. We really haven't talked about it. Right now, our [Technical Difficulty] this year will be 92%, but it's -- the run rate is 90%. We really like to build up the retained cash. We just think it's prudent to [Technical Difficulty] level where if we're doing $200 million of developments, we could have a good chunk of that kind of organically funded.So right now, it hasn't really been discussed. And I just think maybe once that cash -- retained cash gets up to -- it's at $50 million right now, and if it gets higher, maybe. But right now, we're not talking about it at all because we're just focused on the development program.
[Operator Instructions] Your next question comes from the line of Pammi Bir from RBC Capital Markets.
Apologies if this was already mentioned, but can you provide maybe some additional color on the drop in industrial same-property NOI in the quarter?
Pammi...
I can take that.
Go ahead.
Yes. Look Pammi, it's really a combination of 2 things. One is, as I said before, we had some accounting adjustments last year, and we kind of just on timing, it trued up in Q4. So that number was a bit higher. And also, we've had some leasing in Alberta, and we've kind of talked before about a bit of softness in the Edmonton market. So we've seen a bit of [Technical Difficulty]. So those are probably the 2 drivers of why it's down.
Got it. Okay. That's helpful. I guess, in terms of the re-leasing of that space in Alberta, how are you feeling about that over the next 12 months or so?
Yes. I mean we are seeing a good amount of activity, particularly in our Calgary portfolio, where -- sorry -- I think we're -- where we're optimistic we'll lease the Calgary space in -- within the year. In Edmonton, that's where we think there'll be sort of a longer lease-up time.
But Pammi, the benefit of being diversified is we -- there is some softness, as Ana mentioned in Edmonton, but we're getting really good rent growth elsewhere in the country, and you should see it come through in the numbers.
Yes. Overall, our rent spreads in industrial are over 10% [Technical Difficulty]. So -- and Ontario is obviously driving that, but we're seeing [Technical Difficulty] growth in the maritimes as well.
Great. Just maybe switching gears to the office portfolio. I realize this is a pretty small piece of the business at this stage. But do you have an estimate of, I guess, the current amount of space that's on the sublease market in your portfolio? And how are conversations going on leasing up some of the vacancy?
I don't have the exact number -- square foot or percentage of space in our portfolio. It isn't significant. We probably have a couple of pockets at [ one 75 floor ] and actually very little in our Calgary portfolio, so -- and also in Vancouver.So it [Technical Difficulty] that much, but the overall market, clearly, everyone who's reading reports knows that the vacancy -- the sublease vacancy is increasing. But sort of in terms of our portfolio, I mean I think we tend to have smaller tenants which are a little stickier. It's more difficult for them to downsize [ 25% ] when it's just -- usually, it's not economical to do so. And so we think there'll be less impact to the amount of sublease availability.
Great. Just 1 last one. I guess, on 110 Yonge, did you consider at all perhaps acquiring the 50% stake that's, I guess, under contract from your partner? Or are you generally just comfortable with your exposure on that property?
We did look at acquiring it, but you'll see when the information is disclosed, Pammi, the pricing is very tight.
There are no further questions at this time. I'd turn the call back to President and CEO, Rael Diamond, for closing remarks.
Thank you, Jason, and thanks, everyone, for joining our call today. Please do all you can to stay healthy and safe, and hope everyone has a good Family Day, long weekend coming up. Thank you.
That concludes today's conference call. Thank you, everybody, for joining. You may now disconnect.