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Thank you for standing by. This is the conference operator. Welcome to the Melcor REIT Third Quarter 2021 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 CEO. Please go ahead.
Thank you, Ariel, and good morning, everyone. Welcome to our conference call and webcast for the third quarter of 2021. With me on today's call is Naomi Stefura, Chief Financial Officer of the Melcor REIT. Today, I am, again, reporting on positive results that have been produced despite another 3 months spent navigating business restrictions brought on by COVID-19. In the quarter, many businesses in Alberta chose to implement the restrictions exemption program. My admiration goes out to all businesses that have continually had to change, pivot and adapt to new rules. We are supportive of all measures taken to increase vaccination rates and get businesses operating at full capacity without the burden of restrictions. Our results for the third quarter of 2021 remain stable, trending towards positive, though we remain uncertain of long-term impacts that the restrictions and the end of the government support programs will have on our tenants. To speak to our performance and guide you through our financial highlights for the quarter and year-to-date, I now turn the call over to 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 on 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. I have a few mandatory statements to make. Then I'll walk you through a few of the financial highlights. 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 that 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 September 30, 2021. Last year, our business saw certain anomalies that make direct comparison of the quarters less meaningful than usual. The details can be found in the Highlights section of the MD&A.Our portfolio performance improved in the third quarter. Revenue was steady while net operating income saw an increase of 5% compared to the first 9 months of 2020. Both revenue and NOI were affected by early termination fees of $1 million collected from a restaurant chain in Leduc earlier in the year. FFO was up 9%, and ACFO was up 19% compared to 2020.Distributions made during the quarter represent a payout ratio of approximately 67% of ACFO in the quarter and 61% year-to-date compared to 75% and 78% in the comparable period last year. The fluctuation in payout ratio is impacted by the lower distributions paid year-to-date in 2021. Subsequent to quarter end, we announced a distribution of $0.04 per unit for October, November and December of 2021, unchanged from prior months. The REIT's portfolio valuation remained stable in 2021 following a full revaluation of our portfolio by our external valuation professionals in the second quarter of 2020. In the current quarter, we recorded a fair value increase in some properties as a result of changes in cap rates. The REIT has collected 99% of third quarter rent and 99% of rent year-to-date.As at September 30, we had $5.65 million in cash and $35 million in additional capacity under our revolving credit facility.We completed 6 new mortgages for proceeds of $63.99 million year-to-date for net proceeds of $15.9 million at a weighted average rate of 2.77%.I will now turn the call back over to Darin, who will speak to our portfolio's operations and performance.
Thank you, Naomi. The efforts of our operations and administrative teams are evident in our results. Thanks to our property management, leasing, operations teams as well as our finance, marketing, human resources and IT teams for continuing to move us forward through these challenging times. With increased vaccination rates and the rollout of the restrictions exemption program, the workforce continues to make its way back to the office, albeit slowly. Dining and entertainment services continue, and the hockey season is in full swing at a full capacity. A sense of normalcy is returning to a world that is still far from the normal we once knew. It's encouraging to see the resiliency of people and of businesses. We continue to trust that the recovery is stronger than the setback that COVID-19 caused.While the REIT's performance has remained stable over this period, we cannot accurately predict the long-term effects of the pandemic once government assistance program ends. They have been extended past this previous end date of September but are now only available to hard-hit employers.Despite this uncertainty, we are pleased to report third quarter rent collections of 99% across office, retail, residential and industrial asset class. With many of the vaccinated returning to work, leasing activity was strong in the third quarter. To date, we've signed over 293,000 square feet of new and renewed leasing, including holdovers, and retained 80% of expiring leases. Future leasing is promising, with commitments on an additional 57,000 square feet of future renewals and 25,000 square feet in new deals.Activity and opportunity continues across our portfolio. Occupancy is slightly up at 88.8%. On July 1, we launched our new MelCARE app in efforts to modernize and strengthen our relationship with our tenant clients. The app allows tenants to submit service requests from their mobile device, a simple and effective way to provide customer care in the technology age.Continually enhancing the customer experience is one of the key components of our strategy to help us retain tenants for the long term. Last quarter, we announced our participation in the Edmonton Corporate Climate Leaders Program and set a target date of December 2021 to develop our own greenhouse gas inventory, and we are on track to meet that deadline. Through our work with Green Economy Canada and the Edmonton Corporate Climate Leaders Program, we are demonstrating that a more sustainable economy is possible. We remain active in our commitment to sustainability and have committed to measuring our greenhouse gas emissions footprint, develop an action plan and set reduction targets for 2025 and 2035. We will continue to provide update on our progress.We continue to focus on the fundamentals of real estate to work with our clients and all stakeholders and recover and grow our business. With a diversified portfolio, a proven management team and a history of adapting through challenging times, we remain well positioned to manage through this period of uncertainty.As Naomi mentioned, we have cash available and availability of undrawn liquidity on our operating line. Amidst the beginning of this pandemic, reducing the REIT's distribution was a necessary cash-saving measure. In 2021, we are pleased to be able to increase the distribution, 33% year-to-date to the present $0.04 per unit. Maintaining this distribution to the end of the year is another positive step forward.Finally, I would like to speak to my retirement that I announced in August. This is my 30th and last earnings release investor call. Wow, how 8 years fly by. I'm so incredibly humble and proud of our entire Melcor team for their commitment, their perseverance and their resilience in spite of recessions, paddemics, global health crisis, economic meltdowns, political upheaval at the federal, provincial, municipal levels and on and on.Our success as a group is a result of so many facets of our business all coming together in one common goal. After all of that, here, we are still focusing on the initial reasons we created this REIT in the first place, to provide stable and sustainable return to our unitholders.Thank you to the equity research analysts and the capital markets groups, whom I've grown to know well, who've taken the time to learn about our business and who've helped us tell our Melcor REIT story. To our REIT trustees, thank you for your guidance and mentorship over the past 8 years. To Naomi Stefura, our CFO, who is not only a big part of creating and growing the REIT, but has been instrumental in our ongoing success and will continue to be into the future, thank you for all you do.While I'm sad this will be my last earnings call, I'm also excited about my next stage in business and in life. Thanks to all of you on the call today for your interest in our Melcor REIT. I know the team will continue to focus on returns for our unitholders. And I commit to keeping a distant but a very intentive eye on the results because after all, I am a unitholder, and my retirement depends on continued success of the Melcor REIT. It's been a great journey and an absolute pleasure.At this time, we'd like to open the phone lines to take your questions. Ariel, can you please open the lines?
[Operator Instructions] Our first question comes from Matt Logan of RBC Capital Markets.
Darin, in terms of your results, they certainly do seem to be stable and trending towards positive. When we look out to 2022 and the lease maturity profile, are there any large tenants that could give back space and maybe some early thoughts on kind of where the leasing environment stands today and the outlook for the next few quarters?
Sure. Thanks for the question, Matt. I guess I'll say whether it's pre pandemic, post pandemic or in pandemic, there's always a risk that tenants can give back space at any time. Having said that, we have over 450,000 square feet of expiring leases in 2022. And the activity that I mentioned we've seen in 2021 is rolling over. So we've already completed about 107,000 square feet of renewals that commence in 2022. So to this -- to date, we don't have any large tenants that are expiring and that we know they are leaving. I'm encouraged that the activity, I'd say a year ago, talking about renewals, most clients pushed us off because they didn't know where the world was. And now we're active into 2022 renewals, and there's even some talk about some 2023 renewals happening early.So generally speaking, I'm encouraged by the leasing activity. And I always feel like the dog that gets kicked when it's not looking. Like if there's a fifth wave, I don't know, maybe all bets are off, but right now, it feels pretty good.
Good to hear. And when I read your press release, there was some commentary on the market being slightly soft. Would that be more or less consistent with prior quarters? Has there been any sort of a slowdown? How should we read those comments?
So 2 things. Consistent with other quarters and also consistent with our culture at Melcor of being cautiously optimistic, of being conservative, I think during this time for us to say things are great would be foolish because things aren't great, but they're better than we thought.So I've mentioned this on other calls, Matt. We have different markets and different asset classes. There's been no significant change in any one market or any one asset class to the worse. If anything, I'd suggest the Edmonton office market has picked up to the better. We see a lot more activity in Edmonton in the last quarter than we have previously.
Okay. Good. Good. And when we think about your mortgage maturity profile over the next, say, 2 years, maybe this is a better question for Naomi, but could you give us a sense for the rates on the maturing debt and maybe where you're seeing indicative rates today?
Good question. I don't have that in front of me, unfortunately. I would assume that the indicative rates today are still lower than what we have maturing. Like all year thus far, things have been sort of maturing and refinanced at lower rates. So the mortgages that we sort of have up for renewal, though coming up, are probably more likely going to be like renewal, not new proceeds or new lender-style mortgages. It just so works out that the majority of the rollovers coming up are sort of on buildings that I don't want to say are challenged, but don't have the best sort of prospects for new lending necessarily. So I think like the net proceeds and the big refinancings are probably going to be light in the coming years.
But I guess, in terms of any rate roll downs, would that be maybe 25 to 50 basis points on maturing debt, do you think?
I'd go on the lower end of what you said, like more like 25.
Okay. Excellent. Last question from me. Just we talked about this in prior quarters, your capital recycling. Any assets that could be sold or opportunities that you see in your markets?
Matt, you know this answer. We've known each other a long time. Everything is for sale at all times for the right price, but we're not actively listing any of our assets for sale, and we are always actively looking. It's been a pretty quiet opportunity market at rates that are accretive for us to purchase. But we're seeing with the talk of interest rates going up, we're seeing vendors whose expectations on sale prices are starting to be a bit muted. So I wouldn't be surprised to see the Melcor REIT with acquisitions and/or vend-ins in 2022. I think it's an important part of our growth strategy here, and that hasn't changed. COVID muted it for a bit, but it's not gone away.
Our next question comes from [indiscernible] of BMO Capital Markets.
I was just wondering about how the shift in the lockdown from -- for Alberta affected the portfolio, especially going from being fully opened to lockdown in early September.
It's interesting. Our collections are still at 99%. And so the lockdown was in Alberta fashion kind of a muted lockdown. Restaurants were still open. There was a couple of weeks where it was uncertain, and they did a lot of takeout and patios. And it's really the restaurant and hospitality industry that we're most concerned about when it comes down to lockdowns. We also had the fortune -- in Alberta, you don't quite often talk about the fortune of good weather, but we had a fantastic summer. And because the option for dining on patios existed, many of our restaurant clients still maintained their business levels. So [ Nicholas ], I'd be foolish to say that there weren't impacts from that. And as I said in my speech, we're still going to see what those impacts will look like. But the lockdown for September of 2021 seemed to have a much less impact than the original 2 lockdowns. And I hope I answered your question okay there, Nicolas.
Yes, definitely. I was also just wondering about the office outlook moving forward. It seems like there's a lot of challenges with office these days. And especially with -- again, with lockdowns and things of that sort, how do you see the office portfolio playing out for you guys?
Sure. I'm going to focus on the Edmonton office market because we have the largest office exposure there, and people pay a lot of attention to Edmonton because the [indiscernible]. I can tell you this most recent quarter was the first quarter since 2019, where we saw positive absorption in the office market. So when I mentioned about the Melcor REIT strong leasing activity, I think you can see that across the office market. Now don't misunderstand [ Nicholas ]. We're not blowing the doors off. This is just maintaining.And I think in our MD&A, you'll see that -- I think even our office occupancy in Edmonton is going up, albeit little by little. But that feels like a win. We still really don't know, right? We're in my office right now in downtown, up Jasper Avenue looking out the window, and there's still a lot of lights off in office buildings. So that makes me nervous. But what's encouraging is we're doing renewals with tenants who aren't even in their offices. So that's encouraging to see. Cautious optimism on the outlook for the office market, [ Nicholas ].
And just kind of building on that with the 7 unscheduled tenant terminations, could you just speak to that a little bit as well?
You know what? I think that that's just your sort of general, some tenants come, some tenants go. Of the tenants that we saw that we had the terminations, we didn't have any real bankruptcies that surprised us. And when I look forward here, I'm looking at just my outlook in front of me. We list all of our tenants. We know who may be coming or going. And quite frankly, [ Nicholas ], I'm pleasantly surprised.I thought there might be more. I feel like 7 is a win. So again, hopefully, that answers your question. That's not anything that we're happy about, but we're also not lamenting about it, too, because there's sort of the general ups and downs. And as long as we can continue to do renewals and do new leasing, we're backfilling a lot of that vacant space.
Okay. Great. And I guess the last one from me is, is there any update on your successor or any time line around that?
Thanks for the question, [ Nicholas ]. That's more of a Melcor Developments question than a Melcor REIT because Melcor Developments provides all the services to the Melcor REIT. I can tell you there are some active conversations. I can tell you that Melcor Developments has a Board meeting on November 9. And so I can't tell you what will be decided at that Board meeting because, frankly, I don't know. Stay tuned.
[Operator Instructions] Our next question comes from Kyle Stanley of Desjardins Capital Markets.
Would you be able to just talk a little bit about your CapEx program and maybe where the spending has been focused year-to-date?
Yes. And the CapEx program was a little muted during COVID for a whole bunch of reasons because we want to make sure we have cash in the bank [ and the rest of it ]. When we look at our CapEx program for 2021 and going forward in 2022, it's your standard bread-and-butter elevators at Melcor Centre in Lethbridge because they're 20 years old. HVAC chillers, some roofs, some parking lots. There's no one single massive project at this time that's planned. It's just accumulation of having buildings with average ages that are -- some of the buildings are more than 12, 13 years' old, and it's just your general cycle. So we just had this conversation internally here with our Board of Trustees as well. And so the CapEx program that we see going forward for Melcor REIT would fall under the category of sort of the standard CapEx that you'd see sort of pre-COVID.
Okay. That makes sense. I think in your disclosure, you mentioned between $2.3 million to $2.5 million expected CapEx budget for 2021. Would you think that, that would be a safe number to assume for '22 as well?
Kyle, I see that growing, not significantly immaterial. But again, back to the 2020, 2021, we're really muted based on some projects that we could delay. So I do see an increase there for 2022, but not material by any means.
Okay. Fair enough. And then just a big chunk of your new leasing activity completed year-to-date commenced during the quarter. Would you say that was maybe one of the drivers to the tick-up in TIs?
Yes. Absolutely. It was a timing thing. What's interesting is I mentioned a bit earlier, I think when [ Nicholas ] asked this question. There was a delay in doing renewals because people just didn't know. And it was hard to get someone in 6,000 feet to renew when their offices were empty. And so there are even some holdovers, and it all seemed to sort of come together in the third quarter. And that sort of falls back to the optimism that Western Canada is seeing. And so it was just a quantum. We hope to see that, that sort of flattens out going forward and stays consistent with what we've seen in the past.
Okay. Fair enough. And then I guess just along the lines of the new leasing. Can you just talk a little bit about these 39,000 square foot seasonal tenants?
Sure. spirit of Halloween. I think if you guys have seen that -- that's not all of them, but we did 3 deals with the spirit of Halloween. And I'm not sure if it's global or national, but I can tell you it's an Alberta thing, everyone wants to spend $90 on a Halloween costume. And there are a whole bunch of pop-up stores that for us, it's great. It leases some space short term. It gets some great revenue. It doesn't tie up the space long term. It gets some activity into areas that were vacant before. And I mean our goal would always to be -- not have any space to lease short term. And you hope it's a great way to market your space, but that's not all the 39,000 square feet, Kyle, but off the top of my head, that's the majority of it.
Okay. No problem. I definitely know spirit of Halloween. And then just the last one from me. Any update on the leasing front at Leduc Common? Or any updates with RBC Plaza? I know things kind of got put on the back burner there just with COVID.
Yes. So Leduc Common, it continues to move forward. And I don't have a number in front of me, but I know we did our PetSmart deal, and we filled some space there, too. So we still have the vacancy. [indiscernible], which is 600 to 700 square feet. That's the one that the MDA refers to -- the MD&A refers to the payout that we got.I can tell you there's a ton of pressure on our leasing people to fill that space because that's how the REIT makes money. You get a payout up front and then lease it quickly. So the RBC building is back on our radar for potential redevelopment, no promises at this point, but we have some opportunities there. We have some interest. So I know I get criticized for using this term stay tuned, because it seems so noncommittal, but ask that question next quarter, Kyle, get a more specific answer than my fumbling through and not telling you, something was not finalized yet.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Rayburn for any closing remarks.
Thanks, again, for the questions today. It's always one of the most unnerving, but one of the parts that I think I'll miss the most. I love the question period because I think it lets analysts and capital markets people and investors figure out if people actually know their business, and I've always been proud that we do know our business.So in closing, again, I wanted to express my gratitude to the Melcor REIT Board of Trustees, to my colleagues, to our unitholders, to everyone on this call, to our stakeholders, for all your support over the years. It's been an interesting ride. The ride will continue. Everyone, I just want to pass on, stay healthy and stay safe. I wish you all success in your ongoing endeavors. Good day to you. And I will now drop the mic and say, Rayburn out. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.