CT Real Estate Investment Trust

TSX:CRT.UN

Q1-2025 Earnings Call

[Operator]

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 REIT's Q1 2025 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 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 their Q1 2025 and annual 2024 Management Discussion and Analysis as well as their 2024 annual information form, all of which can be found on CT REIT's website and on SEDAR+.

I will now turn the call over to Kevin Salsberg, President and Chief Executive Officer of CT REIT. Kevin?

[Kevin Salsberg, executive]

Thank you, Gigi. Good morning, everyone, and thank you for joining us this morning on CT REIT's first quarter investor conference call. I am very pleased to report that Q1 was another strong quarter for CT REIT. Our solid portfolio continues to provide a steady and growing base that underpins our ability to deliver reliable and durable results even in these challenging macroeconomic times. With occupancy stable again this quarter at 99.4%, we delivered growth in same-store NOI of 1.5%, which when coupled with our intensification activity over the past year led to growth in same-property NOI of 3.1%. NOI overall grew at 4.6% on the back of the same-property NOI growth, coupled with growth driven by recently completed acquisitions and developments as well as a development fee earned in the quarter. This development fee relates to entitlement work that CT REIT completed on behalf of Canadian Tire for one of its own properties located in the city of Toronto, and Jodi will speak to this a little further in her remarks.

The robust growth in net operating income drove AFFO per unit growth of 3.9% in Q1, a very strong showing. On the back of these positive results, our Board of Trustees approved an increase in our distributions of 2.5% payable with the July 2025 distributions. This represents the 12th time since our Initial Public Offering in 2013 that we have provided our unitholders with such an increase in the monthly amounts they receive from us. A unitholder who has been with us since IPO has enjoyed a 45.9% cumulative increase in distributions paid since that time, which represents a 3.3% compound annual growth rate, a track record that we are very proud of.

When I look back over the last 5 years, whether we were managing our way through a pandemic, volatility spurred on by rapidly rising interest rates or the most recent economic turmoil and uncertainty brought about by tariffs, CT REIT has managed to consistently deliver strong growth in earnings, increase its distributions on an annual basis and maintain its strong balance sheet and credit metrics. I am appreciative of the efforts of our team and our relationship with Canadian Tire, which are key drivers of this success and which put us in a great position to continue to navigate our way through these volatile times.

I will now turn it over to Jodi and Lesley to provide some additional details on the quarter, our results and our leasing and development activities. Jodi?

[Jodi Shpigel, executive]

Thanks, Kevin, and good morning, everyone. As Kevin mentioned, the REIT earned a development fee from Canadian Tire in the quarter for work completed related to the submission of official plan and zoning bylaw amendment applications for a commercially zoned property owned by CTC in the city of Toronto. These applications, which have now been approved, have set the stage to allow for a mix of uses on site, including residential and retail and achieved a total density of approximately 900,000 square feet as well as permissions for approximately 1,050 residential units. The REIT oversaw and managed this process and was successful in achieving these entitlements. Neither Canadian Tire nor CT REIT currently have any plans or intentions to redevelop this property.

We are pleased to report that our own development activities continue to provide tremendous opportunities for us to grow our portfolio of high-quality assets. For example, early in the quarter, CT REIT entered into a ground lease agreement with a third party to facilitate construction that is now underway of a new Canadian Tire store in Kelowna, British Columbia. Upon completion in Q4 2025, this store will add approximately 186,000 square feet of incremental GLA to our portfolio and will be built to Canadian Tire's Net Zero ready prototype, which has an energy-efficient design. And our development pipeline overall remains strong with 20 projects at various stages with approximately half of these projects expected to be finished this year and the remainder expected to be completed in 2026 and beyond. These developments represent a total committed investment of approximately $331 million upon completion, $112 million of which has already been spent and $154 million of which we anticipate will be spent in the next 12 months. Once built, these projects will add a total incremental GLA of approximately 891,000 square feet to the portfolio, approximately 97% of which has been pre-leased.

During the quarter, CT REIT also completed 2 Canadian Tire store lease extensions. And as of the end of Q1, the weighted average lease term for our portfolio was 7.5 years, which remains one of the longest in the sector. As Kevin mentioned earlier, at the end of the quarter, CT REIT maintained its 99.4% occupancy rate.

With that, I will turn it over to Lesley to discuss our financial results. Lesley?

[Lesley Gibson, executive]

Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we are pleased with the results delivered by the REIT again this quarter. Same-store NOI grew 1.5% or $1.7 million. Drivers of the same-store NOI increase were contractual rent escalations of $1.9 million, primarily being the 1.5% average annual rent escalations included in the Canadian Tire leases, partially offset by lower CapEx and interest recoveries, which reduced NOI by $219,000 in the quarter. Same-property NOI grew by 3.1% or $3.5 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 $1.8 million from the intensifications completed in 2024. Overall, in the fourth quarter, NOI grew by a healthy 4.6% or $5.2 million, driven by the increase in the same-property NOI as well as by acquisition activity, the completion of development projects in 2024 and the development fee revenue that Kevin and Jodi spoke to earlier. Excluding the development fee revenue, NOI grew by a solid 3.7%.

In the first quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.7%, which is 100 basis points lower than in the same period of the prior year of 3.7%. This decrease was due to the timing of a deferred income tax provision of $1.1 million in 2024. The fair value adjustment of $24.8 million in the quarter was primarily driven by contractual rent increases as well as leasing activity within the portfolio. In the quarter, diluted FFO per unit was up 3.3% to $0.342 compared to $0.331 in the first quarter of 2024. Growth in AFFO per unit on a diluted basis was $0.320, up 3.9% compared to the first quarter of 2024.

Cash distributions paid in the quarter increased by 3% compared to the same period in the previous year due to the increase in distributions, which became effective with the monthly distributions paid in July 2024. As Kevin mentioned earlier, we're pleased to announce our 12th distribution increase since our IPO, reflecting our financial strength and consistent delivery of strong results, which will become effective with the July 2025 distribution. With growth in AFFO outpacing the growth in distributions, the AFFO payout ratio for Q1 was 72.2%, down from 73.1% in the period last year.

Now we turn to the balance sheet. Our interest coverage ratio was 3.55x for the current quarter, which was in line with the 3.57x in the comparable quarter of 2024. As previously discussed, in 2025, we anticipate refinancing certain maturing debt at a higher interest rate, which will lead to an increase in net interest expense compared to the previous year. The interest rate for the $252 million of Class C LP units maturing at the end of May has been reset to 4.38% for a 5-year term. The indebtedness to EBIT fair value ratio was 6.55x for the quarter, lower than last year's ratio of 6.81x, primarily due to the growth in EBIT fair value for increased NOI as well as a slight decrease in total indebtedness. Our indebtedness ratio was 40.3% for the quarter, which is lower than the indebtedness ratio from last year of 41.1%, primarily due to an increase in fair value of investment properties and partial repayment of the credit facilities. Our indebtedness ratio continues to be within our target range.

Lastly, with respect to liquidity, we ended Q1 with $3 million of cash on hand and $297 million remains available through our committed credit facility. A further $232 million is also available on our uncommitted facility with Canadian Tire Corporation.

And with that, I'll turn the call back over to the operator for any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Lorne Kalmar from Desjardins Capital Markets.

[Lorne Kalmar, analyst]

Just a quick one for me, and I appreciate all the color on the development fee revenue, and I feel like I have a good idea, but just wanted to confirm. Is this something that you expect to be repeatable? Or this is sort of a one-off and we might see quarters down the road where we have and we might not?

[Jodi Shpigel, executive]

Lorne, it's Jodi. It is actually just a one-off. There's possibly more in the future, but really, it's a one-off.

[Lorne Kalmar, analyst]

Okay. Fair enough. And then maybe one last quick one. To the extent that you guys are already looking at the 2026 lease negotiations, just wondering if you could give us any update on how those are proceeding?

[Kevin Salsberg, executive]

Yes. If you recall, Lorne, the notice period for exercising of options with Canadian Tire is 18 months out. So we're already in the thick of dealing with 2026. I would say those negotiations are progressing well. They mirror probably our performance on renewals to date. But I think they also take into consideration the strength we're seeing in the retail leasing market more broadly and our experience over the last, call it, 12 months plus with our third-party tenants as well. So trying to triangulate all those things to make fair and balanced renewals and also drive rents.

[Operator]

[Operator Instructions] Our next question comes from the line of Gaurav Mathur from Green Street.

[Gaurav Mathur, analyst]

Just a quick question for me on the parent company. Now we've seen Canadian Tire streamline their operations and even merge and shut down a couple of banners. Has there been any conversation around future intensification opportunities beyond the 20 projects that you have currently in the pipeline and how that would be affected?

[Kevin Salsberg, executive]

You're talking about REIT-specific sites, Gaurav?

[Gaurav Mathur, analyst]

Yes. Yes.

[Kevin Salsberg, executive]

Yes. I mean we own great urban assets, and we recognize that one day, they could certainly have higher and better uses. Having said that, there are operating retail stores that are generally quite profitable for the parent company. So we've talked about it in the past, but any type of intensification or redevelopment, the first thing we'd have to do is solve for what happens to the store. And obviously, there's a series of options that could be available in terms of a relocation or closing down and reopening. But those are all complicated and they take time. So I guess what I would say is while that optionality exists, there's no specific plans in place today for any of our locations on an imminent basis.

[Operator]

[Operator Instructions] Our next question comes from the line of Linda Wang from TD Securities.

[Unknown Analyst]

This is Linda standing in for Sam Damiani. So on the fair value gains recognized for 5 consecutive quarters, largely on growing NOI, while cap and discount rates have remained largely unchanged, how are you thinking about the relationship between rising rents and NOI versus the cap and discount rates? And do you expect higher -- cap rates and discount rates to become more negative offset in determining fair value gains in the future?

[Kevin Salsberg, executive]

Linda, I can try to take that. I mean, as you know, we have embedded annual rent escalators in our leases with Canadian Tire. On average, they are 1.5% every year. So from the base portfolio, we're experiencing that rent and NOI lift. We triangulate that against what we see in the market in terms of cap rates for comparable assets. Quite frankly, the investment market over the last year, 1.5 years has been a little slower than we would have expected. Retail is certainly still a coveted asset class from investors. There's just not a lot being sold right now, not a lot on the market. So from what we're seeing out there, cap rates for defensive solid tenant credit retail has remained fairly constant, fairly flat. And obviously, to the extent our NOI is growing, we apply what we believe is the best estimation of market cap rates against our growing NOI base to come up with our fair value. So I hope that answers your question, but that's how we kind of approach it.

[Operator]

Our next question comes from the line of Giuliano Thornhill from National Bank.

[Giuliano Thornhill, analyst]

Just had a couple. To the extent that you can comment, are you aware of what the REIT's involvement might be in the True North strategy at the parent?

[Kevin Salsberg, executive]

Yes. So Canadian Tire this past quarter launched an updated, refreshed new transformational strategy they're calling True North. I think for the REIT, it will probably be not all that different from their last version of strategy that they were calling Better Connected, where the store is still a central part of the relationship between the company and the customer, which is at the heart and focus of what they're trying to do, trying to be more consumer-centric and the bricks and mortar and the supply chain obviously play key roles in that. We have talked over the last couple of quarters about the pace at which new store projects have been slowing. Our development pipeline right now, we're very happy with. It's amongst the largest it's been in some time at almost 900,000 square feet. We'll be delivering hopefully 500,000 to 600,000 square feet by the end of this year. But I think True North like Better Connected will continue to drive opportunities for us, albeit perhaps at a slightly slower pace.

[Giuliano Thornhill, analyst]

Okay. And then just my next one was just on the distribution increase. Like what are the key kind of inputs to deciding the 2.5% versus 2.7% last year or before that, it was 3%?

[Lesley Gibson, executive]

Giuliano, it's Lesley. We definitely look at where our -- where we're forecasting our results to be. And obviously, with a little bit higher headwinds in interest rate, we felt that our AFFO growth might not have been as high as it is in the past. And I think we try to take a balanced approach between rewarding unitholders with that and then retaining cash back into our operations. So I think those are probably the main factors in coming up with the 2.5% this year versus 3%.

[Operator]

Our next question comes from the line of Brad Sturges from Raymond James.

[Bradley Sturges, analyst]

Just one question for me. Just on the -- just looking at your Series B debenture coming due, I guess, in June, just can you walk through the refinancing options that you're looking at right now? And I guess, more specifically, kind of what's been the movement in the credit spread market for unsecured debt in the last few weeks since Liberation Day?

[Lesley Gibson, executive]

Well, I was going to say, as far as our plans -- I mean, we still are focused on our -- the public markets for our primary source of debt funding with all of our sort of assets barring sort of one being secured, that really is the unsecured balance sheet. So I think that's still our main focus. As far as where things have gone in the last number of weeks, I would say last week's credit spreads went up a little bit. And then in the last sort of 1.5 weeks have actually come back down. All-in rates are still a little bit more expensive than they were sort of 8 weeks ago. But really, we've seen in the last even 2 weeks, 10 to 20 basis point change in the all-in. So it's -- they're definitely moving all over the place. But I would say last 10 days have been moving lower this week lower than last week, a couple of weeks a bit higher. So hard really to triangulate and one never knows what news might arrive tomorrow that could change that. So definitely a state of flux.

[Bradley Sturges, analyst]

Okay. So from a modelling perspective, where would like an all-in rate be today or roughly speaking?

[Lesley Gibson, executive]

I would say in like the -- around the sort of 4.30% plus or minus, et cetera, where things were, but it's for a 5-year. But again, a week before, that could have been 10 or 15 basis points higher and a few weeks before that lower. So it's hard to really peg it. Day-to-day, things are really changing.

[Operator]

[Operator Instructions] 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, executive]

Thank you, Gigi, and thank you all for joining us today. We look forward to welcoming you to our Annual Meeting of Unitholders, which we will conduct virtually later this morning at 10:00 a.m. We hope that you'll be able to listen in. And we look forward to speaking with you again in August after we release our Q2 results. Thank you.

[Operator]

This concludes today's call. You may now disconnect.