CT Real Estate Investment Trust
TSX:CRT.UN
Earnings Call Analysis
Q3-2023 Analysis
CT Real Estate Investment Trust
Despite facing a tough economic climate, the company showcased resilience with a promising total return of 131% to unitholders, surpassing the S&P TSX Composite and S&P TSX Capped REIT indices significantly. The company expanded its portfolio by adding 117 properties and maintained a robust occupancy rate above 98%, which firmly positions the company for stable future growth.
The quarter witnessed strategic investments, including a $28 million development adding to the gross leasable area and supporting the growth strategy. With a pipeline exceeding 1 million square feet and 25 properties at various development stages, the REIT is well-positioned to enhance its portfolio value. The occupancy remained strong at 99.1%, reflecting the company's ability to retain tenants and maximize the utilization of its properties.
AFFO per unit saw a notable increase of 3.1% to $0.301, attributed to growth in same-store net operating income and the impact of intensification projects. The AFFO payout ratio remained financially prudent at 74.8%, even with a 3.5% increase in distributions per unit over the previous year, allowing the company to maintain a balanced approach to distributing earnings while investing in growth.
The company reported a healthy increase in same-store net operating income (NOI) by $1.9 million or 1.8%, bolstered by contractual rent escalations and effective cost recovery mechanisms. The same-property NOI also grew by a notable $3.6 million or 3.4%, further solidifying the company's operating efficiency.
Prudent financial management was evident as the company continued unit repurchases, maintaining an equitable interest coverage ratio of 3.71x. Moreover, the debt metrics remained stable compared to the previous year, signaling a disciplined approach towards managing leverage and financial risk. The slight uptick in the indebtedness ratio to 41.1% finds its roots in strategic intensification and development funding, indicating the company's commitment to growth while monitoring its financial health.
The quarter saw a fair value decrease of approximately $66.7 million, primarily due to changes in industrial property investment metrics. General and Administrative (G&A) expenses rose to 2.9% as a portion of property revenue, up from 2.5% in the same period last year, primarily due to increased compensation costs, reflecting investment in human capital to support ongoing growth and operations.
The company's liquidity remains strong, with $73 million accessible through its committed credit facility, and another $300 million via an uncommitted facility with Canadian Tire Corporation. This healthy liquidity profile positions the company to pursue future investments and withstand economic uncertainties, maintaining flexibility to capitalize on market opportunities.
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Good morning. My name is Marie, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q3 2023 Earnings Results Conference Call. [Operator Instructions] The speakers on the call today are Kevin Salsberg, President and Chief Executive Officer of CT REIT; Jodi Shpigel, Senior Vice President, Real Estate; and Lesley Gibson, Chief Financial Officer.
Today's discussion 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 would cause actual results to differ materially from such statements. Please see CT REIT's public filings for a discussion of these risk factors, which are included in their 2022 MD&A and 2022 AIF, which can be found on CT REIT's website and on SEDAR.
I will now turn the meeting over to Kevin Salsberg, President and Chief Executive Officer of CT REIT. Kevin?
Thank you, Marie, and good morning everyone, and welcome to CT REIT's Third Quarter Investor Conference call. Despite a challenging economic environment, CT REIT continues to deliver consistent growth and stable results. When CT REIT was established over a decade ago, the tagline of delivering reliable, durable and growing results was a vision for an enterprise that was set up to not only withstand headwinds, but to thrive in spite of them.
Irrespective of market conditions over the last decade, we have grown our portfolio, earnings, net asset value and distributions, all while improving our balance sheet and payout ratio. As we recently celebrated the 10-year anniversary of our initial public offering, this milestone has given us an opportunity to pause and reflect on our track record since inception, and I'm proud of what our team has been able to achieve over this time.
Highlights to the end of the quarter include; delivering a total return to unitholders of 131%, outperforming both the S&P TSX Composite and the S&P TSX Capped REIT indices, which delivered total returns of 100% and 62%, respectively, adding 117 properties consisting of [ 11.4 ] million square feet to the portfolio. investing approximately $2.6 billion in acquisitions, developments, redevelopments and intensification projects, achieving compound annual growth rates of 7.03% in net operating income, 5.7% in AFFO per unit and 4.66% in net asset value per unit, and declaring an increase in our distributions at least once every year for a total increase of 38%, all while reducing our payout ratio to 74.8%.
Our occupancy rate has consistently remained above 98%, and our weighted average lease term and the weighted average term to maturity on our debt remain amongst the longest in the industry. Additionally, our annual rent escalations and CapEx recovery mechanisms have and will continue to provide steady and reliable organic growth. The underlying fundamentals of our business today are in great shape. Our occupancy rate stands just above 99%. Our development pipeline tied primarily to Canadian Tire's Better Connected strategy sits north of 1 million square feet. And although not immune, we are fortunate to currently be well insulated from the impacts of higher interest rates with only 1 debt maturity to refinance over the next 18 months.
CT REIT's Q3 2023 results are an extension of our track record thus far and validation of a strategy that seeks to continuously deliver above-average relative returns for below average relative risk. Jodi and Lesley will speak to the quarter in greater detail. But as we look to the next 10 years for CT REIT, we are confident in our ability to continue to grow our business and strive towards the continued delivery of reliable, durable and growing results for our unitholders. Jodi will now walk you through an overview of our investment leasing and development activities, and then Lesley will speak to our financial results. Jodi?
Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce 1 new investment this quarter of $28 million. This new investment relates to the land lease and development of a new Canadian Tire store located in Kingston, Ontario that will add an incremental 113,000 square feet of gross leasable area to the portfolio upon completion at a cap rate of 6.9%.
In Q3, we completed 2 projects totaling $40 million, which added an additional 158,000 square feet of GLA to the portfolio. These included the intensification of an existing Canadian Tire store located in Summerside Prince Edward Island, as well as the development of a new Canadian Tire store located at Islington Avenue and Highway 401 in Toronto, Ontario. If you're in the Greater Toronto area, I strongly recommend checking out this recently opened Canadian Tire store has been built using CTC's latest concept connect design and features state-of-the-art in-store technology that elevates the omnichannel customer experience.
At the end of the quarter, CT REIT had 25 properties that were at various stages of development with 5 projects currently expected to be completed by the end of 2023. These development projects represent a total committed investment of approximately $365 million upon completion, $144 million of which has already been spent and $54 million of which we anticipate will be spent in the next 12 months.
Once built, these projects will add a total incremental gross leasable area of approximately 1.1 million square feet to the portfolio, 99.4% of which has been pre-leased at quarter end. We were also pleased to have completed 2 additional Canadian Tire store lease extensions this quarter, taking the year-to-date total of Canadian Tire lease extensions to 27. As at the end of Q3, the weighted average lease term for our portfolio was 8.5 years, which remains one of the longest in the sector. Finally, our portfolio remains 99.1% occupied in line with last quarter.
With that, I will turn it over to Lesley to discuss our financial results. Lesley?
Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we are pleased with the solid results delivered by the REIT again this quarter. AFFO per unit on a diluted basis was strong, up 3.1% to $0.301 compared to Q3 of 2022. This increase was primarily driven by growth in the same-store net operating income as well as the positive impacts of the intensifications completed in 2022 and 2023.
Diluted FFO per unit in the quarter was also strong for the same reasons, coming in at $0.327, up 1.9% compared to $0.321 in Q3 of 2022. Same-store NOI grew by $1.9 million or 1.8%, as a result of contractual rent escalations contributing $1.5 million, primarily being the 1.5% average annual rent escalations included in the Canadian Tire leases. With the balance of the growth primarily from continued recovery of capital expenditures and interest earned on the unrecovered balance which contributed approximately $1.7 million to NOI in the quarter, partially offset by a decrease in property operating cost recoveries of $800,000. In addition, same-property NOI for the quarter was $3.6 million or 3.4% higher due to the increase in same-store NOI and a further $1.7 million from intensifications completed in 2022 and 2023. In the third quarter, when excluding the fair value adjustments, G&A expense as a percentage of property revenue was 2.9%. This figure represents an increase from 2.5% in the same period of the previous year. The primary reason for this increase is higher compensation costs, specifically to the variable component of compensation awards.
With respect to the fair value adjustment, the decrease of approximately $66.7 million in the quarter was mainly driven by changes in the underlying investment metrics for industrial properties within the portfolio and to a lesser extent, from changes to investment properties, metrics related to certain small market retail properties, all partially offset by changes to underlying cash flows as a result of NOI growth and lease extensions.
Distributions in the quarter increased by 3.5% compared to the same period in the previous year, reaching $0.225. As a result, the AFFO payout ratio stood at 74.8%, which represents an increase of 0.5% from the same period last year.
Also in Q3, we continued to repurchase units through our NCIB facility, buying back approximately 1.9 million of our units at an average price of $14.48 in the quarter.
Turning now to the balance sheet. Our debt metrics continue to remain strong with no significant changes from the comparable quarter in 2022. The interest coverage ratio at 3.71x for the current quarter was in line with 3.72x in the comparable quarter of 2022. The indebtedness to EBIT fair value ratio was 6.81x, also comparable to 6.86x in Q3 of 2022. CT REIT's indebtedness ratio slightly increased from 40.6% in the same quarter last year to 41.1%. This increase can be primarily attributed to the higher utilization of credit facilities to finance intensification and development activities in 2023.
Our denseness 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.
Lastly, with respect to liquidity, $73 million remains available through our committed credit facility and a further $300 million is available on our uncommitted facility with Canadian [ Tire Brand ] Corporation. And with that, I'll turn the call back to the operator for any questions.
[Operator Instructions] The first question is from Lorne Kalmar from Desjardins.
Just wanted to quickly chat on the development spend. Obviously, up quite a little bit this quarter. Can you maybe give a little bit of color on what drove that? And I know you kind of alluded to your development spend expectations over the next 12 months. So maybe a little bit more color on that as well, if you wouldn't mind.
It's Lesley. I'll start off. I think, really, it's just more towards the like summer construction season. When we've been building to July and August and -- or sort of June or July, August and September, it tends to be that sort of better months seasonally in terms of what we're developing and what we're paying and accruing for. But I think beyond that, it's nothing unusual from my perspective.
Okay. And then maybe just a follow-up on that. I guess the credit facility has kind of ticked up a bit. Any thoughts on maybe terming that out?
Yes. No, Lorne. I mean our debt strategy in the long term has not changed. We're constantly watching the debt markets. And obviously, the recent 1.5 week sort of decrease in the underlying GSEs is constructive from that perspective. But we also have the option to be patient. We still got room on our bank line and our [ unconditionally ] with CTC. But yes, definitely markets have -- are a lot more positive in the last little while compared to how they have been, say, for the last 5, 6 months.
Yes, it's a low bar to get excited about, but we'll take anything at this point. Okay.
I'll take the border pointer, so no problem.
The next question is from Sam Damiani from TD.
I guess, Kevin, just for you. On the pace of new investment announcements year-to-date, it's a little slower than what we saw last year. And I wonder if you could give us a little color on what you're expecting over the next few quarters in terms of the pace and whether or not you might add another 11 million square feet over the next 10 years?
Thanks very much, Sam. Obviously, it ebbs and flows from quarter to quarter. But the positive is that Canadian Tire remains committed to their Better Connected strategy. They've come in and said that publicly. The Better Connected strategy, to remind you, has a significant real estate component to it, which the REIT will play a role in.
Obviously, we're having continued discussions with Canadian Tire on new projects, new opportunities. I would say, in the text of the current environment, I think both the REIT and CTC are proceeding a little bit more cautiously. We could potentially see the timing of certain projects shift out. But nothing concrete to say about it at this point.
Should there be any changes or specific updates, obviously, we'll telegraph that at the appropriate time. But I am still confident in the pipeline and the opportunity set. I think in the next decade, I'm certainly hopeful that we'll be able to replicate the amount of growth that we've had in our first 10 years. But obviously, that remains to be seen.
That's very helpful. And second one for me would just be on Canada Square. If there's anything tangible you can provide in terms of an update there, both in terms of the progress of the redevelopment, but also any potential impacts to the NOI line for the REIT over the next couple of years.
So I can definitely provide an update. I'm not sure I would describe my update as tangible, though, because there hasn't been too much movement since last quarter, quite frankly. Our municipal approval process is ongoing. We still expect that, that will conclude at some point next year in '24. Obviously, we're still working and Oxford continues to work with Canadian Tire on the future office requirements. But this work stream is still very much underway, and we have no update from the LRT in terms of timing completion.
I think the one thing that continues to evolve, as I just referenced, is the macro environment. And obviously, we'll see how that unfolds over the next little while in terms of decisions that we have to make in terms of next steps and the phasing of the development. But in terms of NOI erosion, I mean, I think we've kind of taking our lumps thus far. Lesley.
Yes. Sam it's Lesley. I mean there are still continued some tenancies within the buildings at the north end of the site that are contributing to NOI. And they will continue to decrease as we head towards the development. But whether we're renewing them on short-term basis or on a gross lease basis, whatever it happens to be, we'll try to keep those as going as long as we can. And those tenants are happy to be here. So there will be some, but I'm not expecting it to be overly material in any given quarter over the next little while.
And just on the flip side, Sam, just in terms of the lease-up of [ 2180, ] which is not part of the first phase of the redevelopment. I think the comment I would make is the office leasing market is slow. We have a couple of floors that are available. I think we could see the floors go independently or portions of floors. So I think it will be a staggered lease-up over time. And I think it will be on the lower end of the lease-up as we're used to relative to our retail portfolio.
As there are no further questions at this time. I will turn back the meeting over to Kevin Salsberg, President and CEO, for closing remarks.
Thank you, Marie, and thank you all for joining us today. I look forward to speaking with you again in February after we release our Q4 results. Have a good day.
This concludes today's call. You may now disconnect.