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Thank you for standing by. This is the conference operator. Welcome to the Melcor REIT Third Quarter 2020 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Mr. Darin Rayburn, President and Chief Executive Officer, for opening remarks. Please go ahead.
Thank you, Anastasia. Good morning, everyone, and thanks for joining us this morning. Typically, I'd be introducing Naomi Stefura, our Chief Financial Officer, to review financial results for the quarter. Sadly, Naomi had a death in her extended family and is not able to attend the call this morning. Our thoughts with Naomi and her family during this most difficult time.Back to the business at hand. 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 on sedar.com. My goal today is to keep the remarks to a brief high-level review of the quarter and then open up the call for any questions. Before getting into the details of the quarter, I have a few introductory and mandatory statements to make. First, certain statements made during the 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 risk section of our annual management discussion and analysis and further supplemented in our Q3 MD&A. Second, we report our financial results in Canadian dollars and in accordance with the international financial reporting standards. We supplement our financial reporting with other nonstandard measures, including FFO, AFFO, ACFO and NOI. We believe these measures are important in evaluating our performance but caution listeners that they may not be comparable to similar measures presented by other companies. These nonstandard measures are defined and reconciled in our management discussion and analysis.Now moving on to the third quarter of 2020. Our portfolio performance remained stable through the 9 months ending September 30, 2020, in spite of the COVID-19 pandemic compounding already challenging markets. Rental revenue was up 6% over Q3 2019 and up 6% year-to-date. Net operating income was down 8% over Q3 2019 due to CECRA write-off, bad debt provision true-ups. However, year-to-date NOI is showing an increase of 1% at $34.27 million year-to-date when compared with the same period to date in 2019.Adjusted cash flow from operations, ACFO, was down 26% to $3.59 million or $0.12 per unit over Q3 2019 and down 7% year-to-date. Our occupancy in our buildings increased slightly over Q2 2020 and sits currently at 88.4%. Distributions of $0.03 per trust unit were paid in July, August and September, for an ACFO quarterly payout ratio of 73%. The fundamentals of our business have remained stable in the third quarter and throughout 2020, and we remain confident in our strategy going forward. We completed lease renewals representing just over 209,000 square feet for a healthy retention rate of just under 80% at quarter end. New leasing has also been steady across the portfolio in spite of the economic volatility, and we've completed just over 98,000 square feet in new deals commencing to date, which is 25% higher than we were last year. And we've also completed an additional 69,000 square feet committed for future occupancy.As I mentioned earlier, occupancy is slightly up at 88.4% and has held relatively steady in a challenging market. The revenue growth of 6% in both quarter end and year-to-date is attributable to our recent portfolio growth. Our acquisition completed in November 2019, which we subsequently renamed Melcor Crossing in Grande Prairie, increased the size of our portfolio by 10% based on a gross leasable area. The impacts of COVID-19 through Q2 2020 and Q3 are now more fully understood and accounted for. In addition to the property value write-downs of just under $60 million year-to-date, we've provided for $1.31 million in doubtful accounts and have given $670,000 net in rent related to the CECRA program, which we applied for on behalf of 79 of our tenants. We also deferred $780,000 in rental payments via deferral agreements with our tenants, which provide for this deferred rent to be paid back over a period of 1 to 4 months. As of September 30, 2020, we had $4.29 million in cash and about $12 million in undrawn liquidity available under our revolving credit facility. It is no doubt that COVID case numbers are currently spiking in Alberta. We are hopeful that this current rise can be curtailed by individuals taking responsibility for their own health and safety as well as those around them rather than resorting to a second round of business closures. As the CECRA program has now ended, tenants will have individual access to new government programs should they require. I'm very proud that we've worked with our tenants. We've worked diligently to support them through the first phase of COVID. We believe that the strong relationship that we continually build on will be the key factor in minimizing the impact going forward. Although the environment does appear more stable, it is still not possible to actively predict the future and the extended duration of the impact of COVID-19 on future results.With the onset of the pandemic in March 2020 and its rapid escalation, we solidified our defensive business strategy focusing on preservation of the REIT on its financial health, on protecting our assets, protecting our tenants, protecting our income, our cash, debt reduction and continuing unit distributions. We have successfully maintained all financial covenants, maintained tenancies, attracted new tenants, maximized cash flow preservation and control costs.Given where we stand today on the current global economic volatility, we are pleased with our current financial position. If things continue as they are with no further major shocks, we are confident we can maintain the steady positioning.We believe that continued solidarity and partnership with our tenants will provide them the best opportunity to endure this pandemic and be successful in the long term. We continue to monitor our situation daily, we make thoughtful decisions and we take actions to come through this together with our tenants.Anastasia, I would now be happy to take any questions. Can you please open up the phone lines.
[Operator Instructions] The first question comes from Kyle Stanley with Desjardins.
So just looking at your office portfolio for a second. I'm wondering how the office leasing conversations have been going? Have you seen any changes in demand for your space that's currently available?
So it's interesting because when you read the media, one would think that there's all kinds of change in demand. There is definitely a delay. But what we're finding is for a number of groups, the demand continues. So in the Edmonton -- because as you recall, we have office in Calgary and Regina and Kelowna, but I'll talk about Edmonton because everyone was talking about Edmonton even before the COVID pandemic came out. But we are seeing the continued demand from the smaller service providing tenants. We are doing deals with chiropractors and smaller accounting firms and consulting firms and marketing firms. So that's where we see our activity.Now one, again, would expect that rates should be falling in a pandemic-laden era. But if you look at the last 2 reports that came out on office market, we're actually maintaining -- our vacancy hasn't grown anymore in downtown Edmonton and office rates are hanging in there. What's changed, Kyle, is what's happened in Edmonton during the last couple of boom and bust cycles is the act on the tenant inducement side has increased. So from an Edmonton perspective, we're still active in our office leasing. Calgary is a bit of a different story. But as everyone on the call I assume knows, Edmonton's downtown vacancy is 17%. Calgary's downtown vacancy is 30% with probably another 20% to 25% of sublease, so it's a much different discussion. And then in our smaller markets, Lethbridge, Kelowna, Regina, we still see activity. And in each of those markets, we're seeing some increased occupancy because of the movement of the smaller tenancies.
Okay. Fair enough. You answered a couple of more questions I had there. So that's good. Just looking at the -- some of the leasing that we've done during the quarter, how long are the 38,000 square feet of short-term deals in place for?
Kyle, it's a mix. It's a mix. A lot of -- in some cases, tenants who expired who weren't prepared to make 5-year commitments. And as we try to preserve cash, we've done 6-month short-term deals, we've done 1 month short-term deals. So really, it's all over the place.Just to be clear -- just so you know like that, that's also not completely unusual because that's been kind of the Alberta policy in the past where tenants are deciding what their next steps are. Also, just to keep in mind, about 7,000 square feet of that 38,000 square feet is one particular tenant in Red Deer which is a furniture store that we've been dealing with for a number of months who was not prepared to make a long-term commitment. So we did a short-term commitment, had to move into the space as is. And thank heavens there were cars in the parking lot last week when I drove through because they're selling furniture.
Fantastic. Okay. So the REIT may not be ready to allocate capital to external growth, again, just yet. But just wondering, I want to get your thoughts on the transaction environment, some of your core markets. Is there much product coming to market? Has there been any kind of repricing since the pandemic? Any signs of distressed selling? But -- just general thoughts, I guess, on that.
Sure. Kyle, one would think that there should be all kinds of distressed selling. We went through this in 2008, we went through this in the early 2000s, we went through in the '90s. What's interesting this time, first of all, there aren't a lot of trades in the markets that we're in and the trades that are happening aren't what we consider bargain basement prices. And when I talk to other people in the industry who I think should be selling their buildings to us, I guess the difference now is the interest rates being as low as they are, whether there's vacancy or some reduced cash flow, there's not this big desire to sell. And the people that I've toured through in Edmonton, who are just looking at the market, who are coming to town are looking to buy or looking to buy at a significantly reduced rate. So I think there's still too large of a gap between buyer and seller regardless of cap rates increasing and regardless of round 2 of the pandemic inning.So we haven't seen the movement yet. I have in the last 2 weeks, starting to see a little more second calls on opportunities. So I would expect this month, next month, there will be more chances. But the short answer to your question, Kyle, is we're just not seeing the volume of opportunities at what we would consider discount rates right now.
Okay. Fair enough. And then just last one for me, and there may not be an update here. Just curious on the repositioning effort on the RBC space. I'm not sure if you've kind of gone ahead or kind of put that on hold due to the pandemic.
We've put it on hold. We're still marketing the space. Still doing leasing there, too, but we have not started any official construction at this point. We want to see how we ride through this next couple of months.
[Operator Instructions] Our next question comes from Matt Logan with RBC Capital Markets.
Darin, could you talk a little bit about the 40 basis point improvement in occupancy? Part of that, going through your disclosure, would appear to be from the short-term leasing. But was there anything else? And did we see a full quarter contribution from those leases in Q3?
So I think there are 2 questions there. The second question was the full quarter contribution. We'll get back to that one, the 40,000 square feet of temp space. And so beyond that. As I said before, Matt, the temp space leasing is not an anomaly for us. Like every year, every quarter, we sort of have a business going back and forth. When I just look at the volume of the deals we've done, and I reported a few minutes ago, there were 209,000 square feet of renewals. I can tell you today, we're at 231,000 square feet of renewals. So the renewals are there.As far as the new deals are considered, what we're finding now, Matt, is the deals we're doing now are not commencing until at least late in 2020, early in 2021. So I don't know if I'd answer your first question about the 40 basis points of increase in occupancy. But as far as how they contributed to the Q3, I'd say most of that leasing -- the new leasing has not contributed to the Q3 results. We'll see that going forward. But obviously, the temporary leasing has because in those cases, the tenants are in, occupying and paying rents. Did that answer your questions, Matt?
Yes. That's good color there, Darin. And when we think about kind of the next few quarters and into 2021, do you have any major lease renewals that you're looking at? Or how should we think about that side of the equation?
Sure. Well, I mean, just to put it in quantum, in 2020, we had 104 tenants expiring, totaling about 330,000 square feet. That's about 10%, 10.5% of our portfolio. In 2021, we have 108 tenants expiring at 289,000 square feet. So the numbers are virtually identical. But if you look at the top 25 by square foot lease expiration in 2021, we've completed renewals on the top 3 already. We know one of the tenants is leaving, and we're active in the others. So we're seeing activity. Most of the 2021, we'd have done almost by now if it weren't for COVID. We'd like to be ahead of the game on our renewals. But obviously, many of our tenants were hesitant to make decisions. So when you look at the largest tenant expiring in 2021, it's 26,000 square feet. Again, it's about 10% of our total expiring. And if you look at the top 25 tenants expiring in 2021, they account for 184,000 square feet. But remember, for everyone on the call, the typical tenant in the Melcor REIT is 5,000 square feet or under. And I feel pretty good about that right now in the current environment that we've got a bunch of smaller tenants that are riding the wave, able to move forward and don't necessarily want to work from home. Was that enough color, Matt?
So I guess when we -- that's great, Darin. And maybe just to confirm my understanding, like if we take a step back at a very high level, it sounds like the retention rate should be more or less within Melcor's normal range of, say, 70% to 80%?
Correct.
Excellent. And maybe just turning to your rent collections. That seems to be trending positively. Is there any sign that, that trend wouldn't continue as we move forward into Q4 in 2021? That you start to get back to more traditional collection patterns?
No. No. And what's interesting is I mentioned the 79 tenants that qualified for CECRA. Remember, we have over 600 tenants. So we had a number of tenants that didn't quite meet the qualification for CECRA and they are still working forward. I guess the one thing just to keep in mind, which is in the MD&A, somewhere I'm sure is, of the $1.3 million in bad debt provision we put in place, $700,000 of that is from 1 large retailer who is currently at war, I believe, with all landlords across Canada. So I will not mention their name, but you know who they are. So we are currently in some heated actions and discussions in our last presentation with them. So if you take that out of the equation and then you just look at what's left on our provisions and then how our rent collections are back up to -- we're 93% in Q2 2020, it feels like we're almost back to normal. I'm scared to say that, Matt, but it just feels like, with spending, all the maths and the craziness around and the sickness, that from a rent collection perspective, we're almost back to normal for now.
Good to hear. And I guess when we roll it all up and think about the run rate NOI on a cash basis. Would it be fair to say that's in and around's $11.2 million, excluding these CECRA charges in Q3? And if that's the case, given the stability, is that kind of the outlook for at least the near-term, barring anything out of the left field?
Yes, correct. Again, but the key point on your comment is barring anything out of the left field, barring another shutdown, barring all types of things, we do. And yes, and raised this comment. And Q3 looks really lumpy because we did all our catch-up from April until September of the deferrals and the CECRA collections and the rest of it. And my compliments go out to our accounting team who have worked tirelessly trying to account for all this, and our operations team, who are the frontline people who are collecting the money and working through this. So fingers crossed that the normalcy will come back to our collections going forward.
And last question for me before I turn it back. When we think about the next 12 to 18 months, can you give us a sense for your strategic priorities? Is it simply to manage through what is a very challenging operating period? Or do you have any other targets that you'd like to achieve, say, maybe some asset dispositions or capital recycling if you see opportunities elsewhere?
I think you summarized it great, Matt. But like, first and foremost, cash in the bank, tenants paying rent, servicing our tenants, keeping them safe. That hasn't changed and won't change until a vaccine comes out. So that's number one.Also trying to pivot to what our tenants need. We talked about leasing earlier. There are some different needs of tenants right now, too, and we're working through whether it's additional storage space, additional temporary office space, whatever that might be. So that's important. Beyond that, it's no secret that we are entrepreneurs. It's how we started this REIT. That's what Melcor Development has been doing for 97 years. We are always looking for opportunities. And whether that opportunity means disposing of something and recapitalizing it on newer opportunities, it's in our DNA, Matt. So while I can't tell you exactly what we're focusing on, I can tell you that it is a part of my role as a CEO of the REIT to make sure that we're not just focused on the day-to-day operation, but we're looking for opportunities that could be accretive and add value to the REIT.
The next question comes from Spiro Klonizakis with HomeLife/Vision.
I've got a question. Many of the other REITs have a list of the top 5 to 10 tenants, either as a percent of rent or a percent of total area. And I've e-mailed in before and I haven't heard back. I'm wondering if there's a reason that you guys don't want to disclose that or just not part of the...
Well, Spiro, it's actually on Page 32 of our management discussion and analysis, but I'm happy to share that with you either now or individual later on. Would you like me to go through the list right now?
Okay. Sure.
Okay. So -- and again, this is as of 2019, the end of 2019. And so our largest tenant is the Government of Alberta. They occupy a total of 109,000 square feet. The percent of total minimum rent is 3.4%, and the percent of gross leasable area is 3.4%, interestingly enough.Number two, Alberta Health Services, which is also Government of Alberta, but it's their medical arm, which is why we qualify it differently. Also 3.4% of total minimum rent, they're just 88,000 square feet, and it's 2.8% of the GLA. Our third largest tenant, Staples Canada, we have 3 locations with them. They account for 3% of the total minimum rent. They're just under 97,000 square feet, and they account for 3% of the GLA.Our fourth largest tenant, Spiro, is Shoppers Drug Mart and they account for 2.7% of the total minimum rent. There -- we have 3 locations with them. They are just over 44,000 square feet and they account for 1.4% of our own growth leasable area.And then number 5 tenant -- number 5 is a company called NDT Global, an industrial tenant. They account for 2.4% of our minimum rent. There are also just over 44,000 square feet, which is about 1.4% of the GLA. And I think, again, the additional -- the top 10 is listed in there, too. So it's there if you want to look at it.
Okay. With regards to the government tenants, do you guys find that they've been paying on time and they've renewed? Or are they also in negotiation?
No, absolutely, paying on time. I can tell you, it feels pretty good having some government tenants, and I can tell Alberta Health Services, like every health authority I think across the world right now is paying on time, needing additional help, needing extra space. They're just trying to manage their infrastructure.
This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.
Thank you, again, for calling in on this strange morning in the world. We continue to focus on our tenants, we continue to focus on our health and safety. We wish health and happiness to all of you. And we will talk to you next quarter. Have a good day, and have a good weekend. Bye now.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.