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Thank you for standing by. This is the conference operator. Welcome to the Melcor REIT Q1 2021 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Darin Rayburn, President and CEO. Please go ahead.
Thank you, Sachi. Good morning, everyone. Welcome to our conference call and webcast for the first quarter of 2021. With me today on the call is Naomi Stefura, our Chief Financial Officer for the Melcor REIT. In preparing for our call today, I reviewed my notes from Q1 last year. It became clear to me that the COVID crisis has confused my timing and my estimation on judgment. Sometimes 1 year ago seems like yesterday, and other times, it seems like an eternity. Last year, on our May 15 call, at that time, the COVID crisis seemed to be dragging on. And yet then, it was only 6 weeks into it. I said things like, this continues to unfold before our eyes without any indication of where we will be and when we'll see the other side of the pandemic and the oil price war. Frankly, I had no idea that we'd be sitting here today in the same situation, if not worse, saying the same things regarding the COVID crisis without any certainty, and yet 12 months later. I will say, in May 2020, we seemed to be entering the rabbit hole. Now a year later, we appear to be exiting it. And while that exit continues to move forward, we can see it. And hopefully, if all Albertans would just behave, we'd be coming out of this faster. It's frustrating, but that's another subject for another time. Back to our results. Through it all, the numbers just don't lie. To review our financial highlights for the quarter, I now turn the meeting over to Naomi. Naomi?
Thank you, Darin. If you have not reviewed the materials related to this call, including the management's discussion and analysis and the financial statements, they are available on the Investor Relations section of our website at melcorreit.ca and sedar.com. Our goal is to keep our remarks to a brief high-level review of the quarter and then open up the call for your questions. Before turning it over, I have a few mandatory statements to make. First, certain statements made during this call may be forward-looking. For a complete discussion of items that may cause actual results to differ, please refer to the Business Environment and Risks section of our annual MD&A. Second, we report our financial results in Canadian dollars and in accordance with IFRS. We supplement our financial reporting with nonstandard measures, including FFO, AFFO, ACFO and NOI. We believe these measures are important in evaluating our performance, but caution listeners, they may not be comparable to similar measures presented by other companies. These nonstandard measures are defined and reconciled in our MD&A. I will now walk everyone through some of the financial highlights of our results for the quarter ended March 31, 2021. Our portfolio performed consistently with growth of 1% for rental revenue and growth of 6% in net operating income compared to Q1 last year. These were positively impacted by a $1 million lease termination fee received in the quarter. Funds from operations in the quarter was also up 6% and ACFO was up 16% compared to Q1 2020. As we were just entering the COVID-19 pandemic at the end of the comparable period, we had paid our normal distribution throughout Q1 2020, and we then subsequently reduced it by 47%. In January of this year, we increased the distribution by 17% based on stable results for a net reduction of 38% compared to Q1 of 2020. Distributions made during the quarter represent a payout ratio of approximately 53% of ACFO compared to 99% in Q1 of 2020. The decrease in the payout ratio was most significantly impacted by the decrease in the distribution paid and also impacted by the lease termination payment received in this quarter. The REIT's portfolio evaluation remained stable for the first quarter, following a full revaluation of our portfolio by our external valuation professionals in the second quarter of 2020. The REIT has collected 98% of first quarter rents, excluding amounts owing and receivables related to year-end collection. We have also collected 98% of April rents. As of March 31, 2021, we had $4.46 million in cash and $28.5 million in additional capacity under our revolving credit facility. We reactivated our NCIB following the lifting of the year-end blackout period. We repurchased 38,477 units at a cost of $230,000 in the quarter. We renewed our NCIB for another year effective April 1, 2021, and have purchased a further 43,382 units for $280,000 subsequent to the quarter. We completed the refinancing of 2 Edmonton area properties for gross proceeds of $15.14 million or $3.45 million net at a weighted average rate of 2.96%. Discussions are underway with our syndicate lender for renewal of the credit facility as well as offers from lenders for financing on 3 secured debts, coming due this year with a combined maturing balance of $36.58 million. We expect to be able to refinance all the remaining debts at market competitive terms. I will now turn the call back over to Darin, who will speak to our portfolio's operations and performance.
Thank you, Naomi. As we celebrated the -- Melcor REIT's eighth anniversary at May 1 this year, I reflected on the fact that our portfolio has continued to perform with stability throughout the COVID-19 pandemic. This is a true testament to the purposeful diversity in our tenant base, which I remind listeners was a specific deliverable in our decoration of trust upon founding the Melcor REIT 8 years ago. Our neighborhood shopping centers are comprised of many of the essential services that people rely on daily, including pharmacies, grocers, banks, gas stations and fast food drive-throughs. Last evening, the Alberta government implemented a new round of restriction specifically aimed at stopping the spike. The long-term impact on our retail, industrial and office leases remain to be seen. However, we expect that the return of work will take place in some form once it's safe to do so. We are pleased with the amount of net rent we have received during the pandemic, collected 98% of rent across office, retail and residential and industrial assets. The pandemic hasn't muted our focus on sustainability in our portfolio and reduced greenhouse gas emissions. We continue to actively seek out programs to benchmark our energy use and actions to support the continued intentional reduction of our carbon footprint. In Q1 2021, we received the Energy Star certification for our Fountain Tire place building in Edmonton with a score of 88 out of 100, which represents that the building is more energy-efficient than 88% of similar buildings nationwide. We also joined and are active participants in the Edmonton's Corporate Climate Leaders Program. Our commitment is to update unitholders on our ongoing environment, social responsibility and governance initiatives throughout 2021. We continue to execute on our proactive leasing strategy to both retain existing and attract new tenants. Lease renewals continued in 2021, and we completed just over 57,000 square feet of lease extensions for a healthy retention rate of 72.4% at the end of Q1. There's an additional 129,000 square feet in finalized completed renewals commencing post Q1 2021. In addition, new leasing has been active across the portfolio, with just under 38,000 square feet in new deals commencing to date in Q1 and an additional 55,000 square feet committed for the rest of 2021 so far. Occupancy for the portfolio is slightly down at 87.2%, but has held relatively stable throughout these challenging markets with weighted average base rents on renewals maintaining the previous year levels, indicating no material renewal rate reductions. COVID case numbers are once again spiking in Alberta. And as I mentioned earlier, additional measures, including the shutdown of indoor dining and personal services have been put in place. However, essential businesses remain open. We are hopeful that the continued ongoing rollout of vaccines and the newly implemented 3-week circuit breaker will stop the spike and allow our tenants to return to regular business in the near future. We worked diligently to support our tenants through the first 2 phases of COVID, and we'll continue to do so. We believe that the strong relationships that we continually build with our tenants have been a key factor in minimizing the potential negative impact of COVID on our business. Continued solidarity and partnership with our tenants will provide the best opportunity to endure the pandemic and be successful in the long term. We continue to actively monitor the situation, make thoughtful decisions and take actions that come through this for the long-term success all of our stakeholders. When COVID-19 is finally under control, at this point, no one truly knows when, when the economy is back to the new normal in Alberta, BC and Saskatchewan, our primary markets, many are now predicting the transition out of the COVID depression back to a potential spike in business. Last year, I referred to jumping back into an oil-based recession at the conclusion of the COVID depression. Feels much different a year later with West Texas Intermediate around $65 per barrel today, whereas $31 per barrel trading this time last year. Encouraging, definitely. Frankly, in Alberta, we've been battling volatile oil prices one way or another for a long time. But in terms of the Melcor REIT, we've been battling headwinds since oil dropped from $100 a barrel to $50 a barrel in 2014. Yet, here we are still kicking, still fighting, never ever giving up. It's the Alberta way and it's the Canadian way. With a diversified portfolio, proven management team and a history of adapting through challenging times, we remain well positioned to manage through this period of uncertainty. We do continue to anticipate that the emergency measures enacted to contain COVID and the resulting economic impact to many of our tenants may have negative repercussions on our future cash flows and net operating income. The extent and duration of this impact to our results cannot be actively predicted at this time. Yet here we are a year into it, and very happy with our results today. We continue to work with our tenants as partners, so that we can all get through this together. Managing cash flow, while also maintaining a safe environment for our tenants and visitors during COVID continues to be our top priority. As Naomi mentioned, we have cash availability and availability of undrawn liquidity on our operating line. The distribution reduction last year was difficult, but necessary. The recent increase of 17% is a good first step. We're not done yet. We have ways to get back to pre-COVID distribution levels. However, we're trending in the right direction. We trust that the measures we have taken and are continuing to take will reduce stress on tenants and slow the spread of the virus, so that can all return. Now as I said before, if we can all just get Albertans to behave, this will happen in our primary end market much quicker. At the Melcor REIT, we continue to monitor the situation, make thoughtful decisions and take actions to come through this together with our tenants. I would like to express my deep appreciation to our trustees. Thank you for your ongoing support, guidance and wisdom, in particular, over the last year. I am incredibly grateful to the Melcor Developments operations and finance teams, including our HR, our IT and our marketing communication groups. They are our service providers for the REIT. I'm grateful for their commitment, their passion, their dedication to the exceptional work they do every day to take care of the Melcor REIT tenants and manage our properties. Operations in the best of times is not easy. During this past year is unheard of, but yet here we are. I'm extremely proud of the team's response to the challenges the current situation has created. Specifically to our tenants, thank you for your continued business and for hanging in there. We commit to work together to respond to the crisis and find a way through it, so we can all move forward. Finally, I want to thank our unitholders for your ongoing support and trust in the REIT and in our business. Yes, the road continues to be bumpy, and the past few weeks seem particularly difficult, but there is light at the end of the tunnel. We can see it. We can't reach it, but we can see it. We are an ecosystem that relies on one another, and we strive to make decisions that support our unitholders and our tenants for the long-term success for each and every one of us. At this time, we'd like to open the phones to take questions. Sachi, can you please open the line.
[Operator Instructions] The first question is from Matt Logan from RBC Capital Markets.
Darin, you had a small lease termination in the first quarter. Can you give us a little bit of color on the tenant and what your pipeline looks like for backfilling some of that space?
Sure. Yes, it was just over 6,400 square feet, Matt. So while not material, the pay was material, so that's where we reported it. It was a national food retailer that was having some challenges prior to COVID in a location that we feel should be stronger. So we negotiated a termination that worked for them. They do have multiple locations with us. And while we don't have a signed deal right now, I can tell you that we have activity on the space. And I will hope to report after Q2 re-leasing the space going forward.
Good news. And last quarter, you talked about some of the positive leasing momentum or at least maybe some of the deal tours for the properties. Could you talk a little bit about how your renewals and new leasing is tracking so far this year? And if you think it will still be enough to offset the downward pressure on rental rates?
Yes. So anecdotally, just look -- I'll make a general comment because, of course, we're in different markets and different asset classes. But generally speaking, as the pandemic ran on and the K recovery came out, there were businesses that still were busy and required. So there's going to be a shift from those trying to just get cheap lease rates to those requiring additional space. So from a retail perspective, while it slowed, we don't have a lot of retail vacancy anyways, and we didn't have a lot of retail renewals. So that's why I think the numbers look pretty good there. Clearly, in all our markets, Edmonton office is still the most challenged. But even then, there is activity in our markets like Kelowna and Regina, very active in the office markets there, too. So Matt, I'm bouncing all over the place on there, but we don't see long-term deals coming every day. What we see is a lot of tenants doing 3 to 5 year deals, some expansions, trying to find opportunities. One of the advantages that we had, and call it luck or call it good timing, is we had some finished space that was available to go. And there were a number of tenants that needed space now that could sign a deal and move in. So we were pretty delighted to see that come to fruition. I'm unsure if the restrictions in Alberta that came out last night will delay things leasing. I can tell you, I learned how to do tours over Zoom, [ a newer ] technology, and we actually did a couple of deals that way. So to make a long answer even longer, Matt, we still see leasing happening. Our team is very active. The broker groups that we work with seem to be active, and there's maybe a little more sense of urgency now to complete deals than there was a year ago at this time.
That's good to hear. Maybe just changing gears to your bad debt. There was a comment in the MD&A that they could remain elevated in the near term. How should we be thinking about the quantum of those bad debts? Would that be largely in line with the first quarter?
Well, I'll tell you, Matt, let me just make a quick comment. We actually recovered some previously identified bad debt. So I think we overestimated it in 2020. And again, we don't know what the future brings, but with the 98% collections, I mean, hopefully, we see the bad debt amount dropping. Hopefully, we've seen the worst that we've seen. I've been in this long enough to know that sometimes you don't see the real pain from an economic depression until a year later. But I think the first quarter is a fair indicator at this point. And if we did okay during the first quarter, where there were still restrictions in place, yes, the restrictions now are much heavier, but I anticipate that we should still be able to hang in there. So I don't know if I've answered your question, Matt, other than the first quarter, I think, is a fair indicator of what we can expect for the year. But I'm hoping that we are coming back again, patting ourselves on the back, saying we overestimated the potential bad debt situation.
Appreciate the color. And last one for me. Just on the review of the relationship with Melcor Developments. Is there any update there? And is that still ongoing?
It is still ongoing. I know there's an independent committee that has taken a mandate to review those and continues to review them. As a matter of fact, they mentioned it yesterday. So while I don't have any update at this moment, it is on their priority list, and it's something that's ongoing, and I would expect for either Naomi and I or whomever to be reporting on those findings going forward.
Next question is from Kyle Stanley from Desjardin.
Somewhat on the same line of questioning as Matt there, it's probably a question a little more for Melcor Developments. But I'm just curious what, if anything, could be potentially coming available to the REIT in the next 12 to 18 months from the Melcor pipeline?
Yes. Thanks, Kyle. And yes, you're right. I mean, I guess, Melcor question, there are projects in active development. I know there's over 100,000 square feet on the Melcor Development side. As far as what could come to the REIT, I guess it depends on the REIT's liquidity, on the ability to raise money, the ability to make the deals accretive. But just to be clear, there are opportunities that the REIT will have a first option to purchase in 2021. I just -- I don't have that information in front of me, Kyle, but I get -- they're all in existing projects where the REIT now currently owns existing commercial retail units.
Okay. Perfect. And then maybe just on the leasing front, based on everything you're seeing with regards to that today and probably factoring in maybe a little bit of a slowdown due to the new restrictions. Would you expect to end the year with higher or maybe lower occupancy than where the portfolio is currently sitting?
Well, Kyle, I'm an eternal optimist. I think to be in this business, you have to be. So but knowing what I know and seeing what I see and talking about -- I mentioned in my notes, not only the Q1 completed renewals and new deals, but the ones that are signed and ready for the rest of the year. We would anticipate to be at higher occupancy. I guess the unknown, as we touch wood, is if some unforeseen bankruptcies come out. But remember, the advantage of the Melcor REIT, we don't have fake tenants. We have very important tenants, but our average tenant is under 5,000 square feet. So unless there's something we are not seeing, we don't see any large clouds out there. Just to give you some other data, our top 25 tenants by square feet who are expiring in 2021 account for about 170,000 square feet of the 300,000 that's expiring. And I can tell you, to date, of those top 25 by square footage, we've completed renewals with 14 of them. We're in active discussions with 4 of them and 5 are vacating. The ones that are vacating are ones that we knew that would be vacating. So I only tell everyone on the call those facts because when you look at what could be coming the last 3 quarters of the year when renewals are such a big, important part of it, as we complete those deals with our larger tenants, it eliminates some of that risk factor for large swings in occupancy. Does that answer --?
Okay, great. Yes. No, definitely, that's good color. It was nice to see, I guess, some progress on the NCIB. I'm just wondering, is there a maximum kind of unit price you'd be willing to repurchase the stock at under the NCIB?
Well, Naomi and I are looking across the table through our masks and see each other smiling because we still believe it's a great buy. But I guess we can't really answer that. That's more of a trustee question. We have the conversations, and we talk about it. So this is a non-answer for you, Kyle. But we had the support to reengage the NCIB, which is an important first step. And again, as far as pricing, we still think it's a pretty good buy even now. So stay tuned.
Yes. No, fair enough. And then just the last one for me. And we don't often discuss the land lease community within the portfolio. Just wondering if -- where the -- given where the commercial real estate market is in your markets, just wondering, is there any interest in ever kind of expanding on that one community? Or is that just kind of a nice cash flowing asset that will just kind of remain the sole one in the portfolio?
It's interesting you mentioned that, Kyle, because you're right. And I've always felt that a bit guilty, and I really hope part of our team members at our Watergrove community are listening because we don't tend to talk about it because it's great. It's full, they collect all their rents. They manage it impeccably. It performs really well for us. Is it a business that the REIT would love to be in more? It is. One of the advantages with that particular community is Melcor Developments, prior to the REIT, was involved in the development of it. So we know it, we built it, we run it. As far as expanding, Kyle, we would always look for opportunities. But I can tell you, we get many calls about it to see if it's an outlier and if we'd like to dispose of it. And while I've been taught to say everything is always for sale at the right price, we've got wonderful partners in that asset, and we're so happy with it. We love having the cash flow.
[Operator Instructions] The next question is from Jenny Ma from BMO Capital Markets.
Along the lines of the questions about the independent committee. I'm just wondering if you know if they're still in dialogue with the activist investor who popped up in the news earlier this year.
To my knowledge, no. I know we're not in dialogue, which we're always happy to have open dialogue with any investor and happy to answer their questions. But no, Jenny, I personally or Naomi have not had any new conversation with them nor have our Investor Relations or the trustees to my knowledge.
Okay. And then with regard to the new shutdowns in Alberta, do you have a sense of how many of your tenants are accessing or have accessed theirs or would be eligible for that? Just trying to think of how much of them may need a bridge as you get through this circuit breaker period.
So with the change of the rules where we don't administer it, it's harder to keep track of it other than asking our tenants. But if you look at the amount of tenants that qualified for it in 2020, it was under 10%. So it was a number smaller than we thought. And just anecdotally, even walk around this morning on the main floor there, talking to some of our retailers about the circuit breaker coming. They're not really talking about accessing the funds. They're actually pivoting to say now that they built these big fancy patios that no one can use, the question is, can we turn it into an expanded takeout area where they can line up [ with help] as people go by. So Jenny, I didn't answer your question. The truth is I don't know the degree, but just based on feedback -- and again, based on the level of rent that we're being paid, I feel like it's not as severe as people think. And while I shudder to say this because I think the next 3 weeks is going to be very difficult on everyone. I hope it's only 3 weeks. And if it's 3 weeks, I think our tenants can get through it. But that's naive for me to say that with a smile because we're all really concerned.
That's fair. I mean, yes. As I'm in Ontario, I have been dealing with it for a while. So definitely not a fun time. Okay. And then lastly, could you give us some color on what you may be seeing on the private market front in terms of transaction activity? Are you starting to see some signs of life? And if you are, within what asset classes in which markets?
I would say, we are starting to see some activity. I wouldn't say there are lots of trades in our markets going. We're getting more packages. I think there's still a disconnect between buyer and seller as a buyer. And I can say we want to get it at a discount because you're pricing in all the risk. As a seller, you think maybe the risk is overstated. And so, we have seen unsolicited offers show up at sort of bargain basement prices. But honestly, I can't criticize that because that's part of how we built the REIT pre-REIT. So again, I'm not really answering your question, Jenny. We are seeing more packages. We're seeing more bids. We're seeing more unpriced offerings, which, to me, in my experience, just shows that sellers aren't panicking, interest rates are low, vacancy hasn't jumped up a whole bunch, but perhaps some of them are wondering if it's not the right time to exit. And so again, the trades that we're seeing, except for a couple of outliers, seem to take longer and be a bit stranger. Hopefully, that answers your question.
Yes, maybe expanding on that, do you see any sort of shift in the types of players coming to the market on both the buy side and the sell side?
Sure. Well. I mean, I can tell you, in our market in Western Canada and specifically in Edmonton, Regina and Kelowna, there's been very little institutional activity, which is to be expected. But what's increased is private buyers. And anything under about $15 million in value, which I know is a bite-size piece, you have more private buyers, high net worth families sort of people buying as opposed to investors trying to build portfolios. Now to be clear, Jenny, there are some outliers. There's some big industrial portfolios in Calgary and Edmonton, Grande Prairie that have been listed. But my sense, and I don't have all the information. My sense is some of these portfolios that are listed are extending submission dates. And when you extend a submission date, we all know that means you either didn't get the number you wanted, you didn't get the interest you wanted. So definitely smaller [ portfolios ].
And these would be presumably local high net worth families and private buyers?
Correct. Correct. I have not seen any significant out of province, out of country buyers in the last month -- last year.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Darin Rayburn for any closing remarks.
Thank you, Sachi, and thank you, everyone, again, for joining us today. As always, we're happy to answer your questions. Looking forward to speaking to you. If you didn't ask a question on the call but had one, you can reach out to me, Naomi or Nicole Forsythe, for Investor Relations at any time. In closing, again, I just want to express my gratitude to not only those that are working within our organization to provide comfort and safety to our tenants, but those who are working in our community so hard to make it safe and livable. I guess, the only thing I can say to everyone, and I say this all the time, hang in there, stay safe, stay healthy and stay strong. Thanks, everyone. Be safe, and we'll talk to you next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.