CT Real Estate Investment Trust
TSX:CRT.UN
Earnings Call Analysis
Q4-2023 Analysis
CT Real Estate Investment Trust
Despite the macroeconomic headwinds, CT REIT has demonstrated resilience, concluding the year with substantial growth across key financial metrics. Net Operating Income (NOI) rose by 4.6%, propelled by a same-store NOI increase of 2.5% and same-property NOI growth of 4.3%. More significantly, the Adjusted Funds From Operations (AFFO) surged by 4.9% per unit, showcasing the effectiveness of CT REIT's operational strategy in a challenging economic landscape.
CT REIT has continued its trajectory of expansion by adding 839,000 square feet of new gross leasable area to its portfolio, which included the completion of a noteworthy 350,000 square foot Net Zero certified distribution center in Calgary. Total investments exceeded $150 million, with additional developments across a mix of Canadian Tire stores and third-party retail, reflecting CT REIT's emphasis on portfolio growth and diversification.
The company has reinforced its balance sheet by repaying all amounts on its credit line using proceeds from a $250 million unsecured debenture offering. As a result, CT REIT commenced the year free of variable-rate debt, with only a looming midyear maturity of Class C LP units. Also, the company has invested in its own units, repurchasing over 450,000 units through its Normal Course Issuer Bid (NCIB), underscoring its confidence in the intrinsic value of its stock.
Looking ahead, CT REIT has revealed a pipeline of developments estimated at about $258 million, which will add approximately 571,000 square feet of space, 98.8% of which is pre-leased. Anchoring this strategy is a notable new redevelopment project set for completion by the end of 2025, anticipated to yield a solid cap rate of 9%.
CT REIT has maintained an impressively high occupancy rate at 99.1% and successfully extended several leases, resulting in a favorable blended weighted average renewal spread of 10.3%. The weighted average lease term stands at 8.4 years, positioning CT REIT among the highest in the sector and highlighting its long-term stability.
The steady growth reflected in CT REIT's financials is partly due to same-store NOI growth and the contributions from intensifications, acquisitions, and developments. Contractual rent escalations and the recovery of capital expenditures have significantly contributed to this upward trajectory, reinforcing the REIT's stable operational footing.
Distributions have increased by 3.5% YoY, with the AFFO payout ratio remaining constant at 74.3% for the fourth quarter. This signals the REIT's ability to generate consistent investor returns, even in a period of robust expansion and development.
CT REIT has navigated fair value adjustments due to fluctuating investment metrics, resulting in a decrease of approximately $39.3 million for the quarter. These adjustments reflect the dynamic nature of underlying cash flows and property values within the portfolio.
The company's interest coverage ratio stands slightly lower at 3.6x for the quarter, indicating manageable debt servicing capabilities. Debt metrics remain sturdy with the issuance of new debentures and an indebtedness ratio of 41.4%, which, although slightly elevated, still falls within target ranges and mirrors the strength of the balance sheet against the broader macroeconomic environment.
CT REIT's liquidity position is compelling, with $21 million in cash and access to up to $597 million through credit facilities. Such liquidity ensures the REIT's capacity to meet short-term obligations and invest in future growth opportunities.
The REIT has signaled a cautious yet optimistic outlook for the year ahead, noting a slowed pace in new investment activity which reflects both the current environment and a typical fluctuation in project flows. Discussion with analysts provided insights on new investments, third-party acquisitions, and the macroeconomic outlook, with the executive team providing reassurance about the solid foundation and adaptability of the REIT's growth strategy and financial planning.
You don't have any saved screeners yet
Good morning. My name is Daniel, and I will be your conference operator today. At this time, I would like to welcome everyone the CT REIT's Q4 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 of CT REIT; and Lesley Gibson, Chief Financial Officer of CT REIT. Today's discussion may include forward-looking statements. Such statements may be 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.
Please see CT REIT's public filings for a discussion of these risk factors, which are included in the 2023, MD&A and 2023, AIF, which can be found on CT REIT's website and on SEDAR.
I would now like to turn the call over to Kevin Salsberg, President and Chief Executive Officer of CT REIT. Kevin?
Thank you, Danel. Good morning, everyone, and welcome to CT REIT's quarterly investor conference call. Despite a challenging macroeconomic backdrop, CT REIT delivered a solid fourth quarter performance to cap off yet another strong year of consistent and growing results. 2023 was filled with accomplishments, key milestones and a memorable anniversary and I'm happy to be able to recap our achievements from the past year with you today.
First and foremost, I am very pleased with the strong growth rates that we achieved across our key financial metrics in 2023. For the full year, we achieved a 4.6% increase in net operating income, 2.5% growth in same-store NOI, 4.3% growth in the same property NOI and an impressive 4.9% growth in AFFO per unit.
These results are a clear demonstration of how the successful execution of our strategy has translated into strong financial performance during the year. This growth in earnings once again contributed to CT REIT's ability to announce yet another increase in its distributions earlier this year or earlier last year as we have done every year since our initial public offering in 2013.
At year-end, our payout ratio on an annual basis stood at 73.4%, a reduction of over 100 basis points relative to year-end 2022. With respect to our portfolio growth, we delivered an impressive 839,000 square feet of new gross leasable area through our active development pipeline and invested over $150 million.
This included our new 350,000 square foot Net Zero certified distribution center in Calgary, Alberta that we completed this past quarter. Canadian Tire has now taken occupancy and will begin operating out of the facility this quarter, and rent commenced on January 1, 2024.
Other notable completions in 2023 included new third-party retail located at our shopping center in Moose Jaw, Saskatchewan, two new Canadian Tire store developments in Sherbrooke, Quebec and Toronto, Ontario and 9 Canadian Tire store expansion projects.
From a balance sheet perspective, we repaid all outstanding amounts owing on our line of credit after raising $250 million in a successful unsecured debenture offering in November. As such, at year-end, we had no variable rate debt outstanding and our balance sheet is in excellent shape with our only debt maturity in 2024 related to one series of Class C LP units that comes due midyear.
Through the course of 2023, we repurchased over 450,000 CT REIT units through our NCIB facility at a weighted average purchase price of $13.99 per unit for a total cost of just over $6.3 million.
And as we described on our call last quarter, we also successfully celebrated CT REIT's 10-year anniversary since going public and our tremendous track record that we have established since our IPO. CT REIT's unwavering dedication to long-term success remains our primary focus. As Jodi will relay, our operational performance this past year reflects the strength of our assets as well as the health of the retail leasing market and our portfolio remains nearly fully occupied.
We continue to proactively manage our weighted average lease term and to work towards driving rental growth by engaging in new leasing activities and renewal discussions with both Canadian Tire and our third-party tenants. From an investment perspective, our development pipeline has been a great source of growth and opportunity for CT REIT. And we were pleased to announce an attractive new redevelopment project yesterday.
We also continue to look for additional opportunities that suit our strategy and fit within our financial parameters. We work hard not to take undue risk and have improved our balance sheet and debt metrics in order to deal with an ever-changing financial backdrop, provide flexibility and capitalize on those investments we feel are best suited to our long-term growth.
I want to take a moment to thank the whole CT REIT team for their efforts, hard work and dedication over this past year. I am very pleased with how 2023 turned out, and we are being purposeful about our prospects as we chart our course for 2024.
With that, I will now pass it over to Jodi to 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 one new investment this quarter. This new investment relates to the redevelopment of an existing enclosed mall located in Winkler, Manitoba. If you recall, we purchased this property on attractive terms in 2016 and expanded the freestanding Canadian Tire store on-site in 2018.
We have now entered into a lease with an additional new anchor tenant that will allow us to partially demall the balance of the property and complete the asset strategy for this property that we devised at the time it was acquired. It is anticipated that this $9.1 million investment will be completed by the end of 2025 at a cap rate of 9%.
In Q4, we successfully completed 7 projects totaling $96 million which added an additional 455,000 square feet of GLA to the portfolio. The projects included expanding 4 existing Canadian Tire stores located in Napanee, Ontario in [indiscernible] British Columbia and Sydney and Bedford, Nova Scotia.
Furthermore, we developed a third-party pad at one of our properties in Hamilton, Ontario, as well as entered into a ground lease with a third party in Kingston, Ontario to enable the future development of a new Canadian Tire store. Lastly, as Kevin noted, we completed our first Net Zero certified distribution center in Calgary, Alberta, and turned over occupancy of the building to Canadian Tire.
As you can see, there were significant activity to conclude the fourth quarter and wrap up a very busy year. At the end of the quarter, CT REIT had 18 properties that were at various stages of development. These developments projects represent a total committed investment of approximately $258 million upon completion $86 million of which has already been spent and $43 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 571,000 square feet to the portfolio, 98.8% of which has been pre-leased at quarter end. We also continue to focus on our existing portfolio of high-quality net leased assets.
In 2023 we successfully extended 28 Canadian Tire store leases and over 310,000 square feet of third-party leases at a 10.3% blended weighted average renewal spread. Our portfolio remains nearly fully occupied at 99.1%. As at the end of Q4, the weighted average lease term for our portfolio was 8.4 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?
Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we were pleased with the solid results delivered by the REIT again this quarter and for the full year. Underpinning the solid growth, our fourth quarter NOI grew by $4.8 million or 4.4% as a result of same-store NOI growth of $2.3 million or 2.2% as well as the contribution from intensifications, acquisitions and developments, which contributed a further $2.5 million to NOI growth.
Drivers of the same-store NOI increase were contractual rent escalations of $1.6 million primarily being the 1.5% average annual rent escalations included in the Canadian Tire leases. With the balance of the growth primarily from the continued recovery of capital expenditures and interest earned on the undercovered balance, which contribute approximately $900,000 to NOI in the quarter.
Same-property NOI for the quarter was $3.8 million or 3.6% higher due to the increase in same-store NOI and a further $1.5 million from intensifications completed in 2022 and 2023. In addition, acquisitions developments completed in '22 and '23 added a further $900,000 to total NOI.
In the fourth quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.6%, which is slightly less than the same period in the prior year. The same metric for the full year was 2.9%, which was the same as 2022. With respect to the fair value adjustment, the decrease of approximately $39.3 million in the quarter was mainly driven by changes in underlying investment metrics for a number of retail properties as well as an industrial property within our portfolio.
However, these decreases were partially offset by positive changes to underlying cash flow assumptions related to the retail portion of our portfolio. For the full year, the fair value adjustment was a decrease of $78.6 million for the same reasons as the Q4 changes.
Diluted FFO per unit in the quarter was up 2.5% to [indiscernble] compared to [indiscernible] in the fourth quarter of 2022. This increase was primarily driven by the growth in net operating income, partially offset by increased interest costs on the public debentures and an increase in the interest expense related to the credit facilities due to higher utilization and higher cost of borrowing.
For the full year, diluted FFO per unit was up 3.5% to [ $1.38]. The Growth in AFFO per unit on a diluted basis was strong for the same reasons, coming in at $0.303, up 3.8% compared to Q4 of 2022. On a full year basis, diluted AFFO per unit increased to [$1.203] representing growth of 4.9% versus 2022.
Distributions in the quarter increased by 3.5% compared to the same period in the previous year. As a result, the AFFO payout for Q4 was 74.3%, which was unchanged from the same period last year. Additionally, in Q4 2023, we continued repurchasing units through our NCIB facility, buying back approximately 3 million units of our units at an average price of $13.50.
Turning now to the balance sheet. Our interest coverage ratio was down slightly to 3.6x for the current quarter compared to 3.72x in the comparable quarter of 2022 mainly driven by the growth in interest expense and other financing charges outpacing the growth in EBIT fair value. The indebtedness to EBIT fair value ratio was [ 6.83x ] comparable to the [ 6.86x ] in Q4 of 2022.
We remain very comfortable with where our debt metrics are. The issuance of the Series I senior unsecured debentures as well as a decrease in the fair value of our investment properties took our indebtedness ratio up slightly to 41.4% from 40.7% in the same quarter of the last year. Our indebtedness ratio continues to be within our target range and considering the current macroeconomic backdrop and interest rate environment, we are pleased with the strength of our balance sheet.
And lastly, with respect to liquidity. At year-end, we had $21 million of cash on hand and $297 million remains available through our committed credit facility, and a further $300 million is available on our uncommitted facility with Canadian Tire Corporation.
And with that, I will turn the call back to the operator for any questions.
[Operator Instructions] Our first question comes from Sam Damiani with TD
My first question is just on -- just on new investments. Obviously, nice to see the redevelopment of Winkler happening. I guess, [ Cole ] had kind of delayed that great, you got a good new tenant coming in as well. But just wondering what the quantity of the new investments are relatively low and also the absence of Canadian Tire being involved a bit of an anomaly? Or is this an indication that the growth rate and the trend of new investments is going to be maybe a little bit slower than it was historically for the near term?
Sure. I can take that, Sam. So the pace has certainly slowed over the last quarter or two. As you know, historically, this has always ebbed and flowed a little. So we seem to be in a bit of an ebb right now. Obviously happy to have delivered over 800,000 square feet of new space last year, more than half of it in this past quarter.
So obviously, we're coming off a big pipeline. A lot of that new space was delivered for Canadian Tire as part of their better connected strategy that we've been a part of. We obviously continue to discuss projects and opportunities with Canadian Tire on an ongoing basis. As we relayed last quarter, though, there's a number of new projects that have been deferred or delayed given the current environment, which I think is prudent.
So I think that's what you're seeing as it triangulates back to our new investment activity and as I said, things ebb and flow. And at some point, I think we'll get back to our baseline.
Okay. That's helpful. And just on the third-party acquisition side, that's also been somewhat quiet in recent quarters. If the outlook is for interest rates to at least be less volatile and eventually start to moderate a bit. Do you see -- are you seeing better opportunities to make third-party acquisitions?
Quality assets are still quite expensive relative to cost of funds. I think that's what we're seeing. I think there's an expectation that will return to the long-term average or get closer to it at some point with bond deals potentially going down at some point in the back half of the year, maybe that happens sooner than later. But at this point, it's hard to find opportunities based on our cost of funds that we can make sense of.
And our next question comes from Lorne Kalmar with Desjardins.
Thanks. Good morning, everybody. I was up at Young Eglinton, and it looked like the construction on the corner there is to be getting close to completion. I was wondering if you have any more clarity in terms of the timing on Canada Square given the progress at that little node there? .
Yes. As an occupant of the Canada Square office complex here, it's great to have the intersection reopened and some of the staging removed. Unfortunately, I'm not sure below ground, it's achieving the same level of progress. We have no specific further updates from the consortium or related to the [ T ] our hope, and I think what they've sort of communicated is maybe by the end of the year. So nothing new to say specifically on our ability to actually progress the redevelopment.
Okay. And then maybe just sticking with Canada Square, I know there was some de-leasing going on there and some leases that may or may not have been renewed. Are we through the majority of that de-leasing? Or do you guys expect there to be a little bit of hit on NOI as we progress through 2024? .
Lorne, it's Lesley. The vast majority of all of that has gone through. There will be I would say, a few odds and sods going through. There's a few tenants that we were able to keep for sort of month-to-month and a bit longer as the project delays. But I would say that de-leasing of the last little bit of the 2,200 building, particularly closer to Young Eglinton is fairly immaterial to the overall scheme of things.
As there are no further questions at this time, I will turn the call back over to Kevin Salsberg, President and CEO, for closing remarks.
Thank you, operator, and thank you all for joining us today. We look forward to speaking with you again in May after we release our Q1 results. .
Thank you. This concludes today's call. You may now disconnect.