Melcor Real Estate Investment Trust

TSX:MR.UN

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Melcor REIT Q4 and Fiscal Year 2017 Conference Call. I would now like to turn the meeting over to Ms. Naomi Stefura, Chief Financial Officer of Melcor REIT. Please go ahead, Ms. Stefura.

[Naomi Marie Stefura, Chief Financial Officer and Corporate Secretary]

Thank you, Elena. Good morning, everyone. Thank you for joining our fiscal year 2017 conference call. On the call with me this morning are Andrew Melton, President and CEO of the REITs; and Brandon Park, Director of Asset Management.If you have not reviewed the materials related to this call, including the management's discussion and analysis and the financial statements, they're 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 the year and then open up the call for your questions.But first, I have a few mandatory statements to make. 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 management discussion and analysis.Second, we report our financial results in Canadian dollars and in accordance with IFRS. We supplement our financial reporting with nonstandard measures, including funds from operations, adjusted funds from operations, adjusted cash flow from operations and net operating income. 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's discussion and analysis. I will now walk everyone through some of the financial highlights of our results for the year ended December 31, 2017. Our portfolio performance remained steady in the quarter with a 1% increase in rental revenue and a 1% decrease in net operating income. For the full year, funds from operations was stable, and adjusted funds from operations was up 1%.Throughout the year, we took advantage of favorable lending conditions and early refinanced $26.97 million of mortgages at an average interest rate of 3.39%. Early refinancing was a strategy employed to mitigate and rebalance our maturity risk for 2018 when 21% of our mortgages were originally scheduled to mature.With this refinancing and others completed earlier in the year, we have reduced the percentage of our mortgages that will mature in 2018 to 9%. We remain well positioned to take advantage of opportunities as they arise.I will now turn the call over to Andy, who will speak to our portfolio's operating performance for 2017.

[Andrew John Melton, President & CEO]

Thank you, Naomi, and good morning, everyone. Thanks for joining the call. It is our privilege to report to you, as the REIT enters its fifth year, I can't believe we're approaching our fifth anniversary. It's like time just flies by. But I can also tell you there was a few months back in the last couple of years that we're going pretty slow out here in Alberta. So we're happy to have them behind us.It's also a good time for us to take a moment just to reflect a little bit. Since our inception, we have witnessed all sorts of market conditions, the decline in oil and its impact on Alberta where the majority of our assets are; an influx of new office product in downtown Edmonton, where 12% of our portfolio is located; and new governments, both provincially and nationally.Against this backdrop, we have consistently executed on our strategy leading to stable results. We paid out total distributions of $3.21 per unit to our unitholders. We maintained occupancy of over 90% through some pretty challenging times. We've achieved our target of 95% plus on-time responses on calls for the past 5 years, which is critical in a difficult market. We pride ourselves in maintaining super good relationships with our tenants.We've also grown our portfolio of gross leasable area by 82% and rebalanced our asset class mix. We completed 4 vend-ins from Melcor, a key component of our growth strategy and our competitive advantage. We also acquired 3 assets from third parties and have since sold 2 assets, monetizing the value we have created, while at the same time, diversifying our portfolio. Through these transactions, we have acquired 1.38 million square feet and sold 90,000 square feet.Once again, our portfolio performance was steady throughout 2017 with 91.8% occupancy at December 31. And as in any diversified portfolio, including -- which includes several geographic regions, some properties are better than others. For example, a weakened Edmonton office, which has affected our portfolio, is being offset somewhat by strength in other areas.We continue to monitor and respond to market demand and trends in commercial real estate and to focus on exceptional customer care as a differentiating factor in a market that tenants -- many tenants have many options to choose from.The vend-in completed recently, which we announced earlier this year, completed in January, further strengthens and diversifies our portfolio to position us well for 2018 and beyond. We remain committed to exceptional property management and customer care to ensure we remain the landlord of choice.At this time, we'd like to open up the phone lines to take your questions. Elena, please open the lines.

[Operator]

[Operator Instructions] The first question is from Kyle Stanley with Desjardin.

[Kyle Stanley, Associate]

So it looks like capital recycling has continued early in 2018 with the sale of the retail property in Leduc. Just wondering if you could provide a cap rate on the transaction and maybe just talk a little bit about other capital recycling opportunities you're seeing.

[Andrew John Melton, President & CEO]

Sure. The cap rates on the Corinthia Plaza in Leduc was 6.1%. We have -- we don't have a specific divestiture program in place, Kyle. We're very happy with the balance of our portfolio. But it all depends -- I mean, if someone makes us an offer we can't refuse, we'll have a look at it. But nothing is planned at this time.

[Kyle Stanley, Associate]

Okay, that makes sense.

[Andrew John Melton, President & CEO]

We do have one asset that is now unconditional moving towards closing, which we'll report once it closed, and it's called Miller Crossing in Northeast Edmonton.

[Kyle Stanley, Associate]

Okay, great. Second, so turning to your lease maturity profile, you have about 16% of GLA maturing in 2018. Just wondering how your discussions with those tenants are going so far and if you've made any progress year-to-date.

[Andrew John Melton, President & CEO]

Sure, I'm going to ask Brandon to answer that question.

[Brandon Park]

Brandon Park here. Year-to-date conversations have been good and steady. We have offers out and received good progress on those renewals.

[Kyle Stanley, Associate]

Okay, great. And then, I guess, just my last question. On the total portfolio basis, do you have an idea of how your in-place rent compare with market rent?

[Andrew John Melton, President & CEO]

Yes. That's a tough one, Kyle, because if you take a look at our portfolio, we've got office, retail and industrial across 3 provinces. I can tell you, on the retail perspective, our retail portfolio is characterized by pretty well-located neighborhoods retail, and we are at market for sure on that -- on those properties. I would suggest in our Edmonton office that -- again, we are at market on our Edmonton assets.

[Operator]

[Operator Instructions] The next question is from Michael Smith with RBC.

[Michael Smith, Analyst]

Andy, you had mentioned that you've seen some strength in the portfolio. I wonder if you could just give us a little bit more color on where you're seeing that strength.

[Andrew John Melton, President & CEO]

Sure, Michael. Thanks for the question. Well, our B.C. assets have done very well last year. We have one asset that, for the first time since we've owned it, is 100% full and performing very, very nicely. We do have -- in our retail portfolio, we still continue to see modest but some growth across the board. And so they're helping to pull the weight for sure.

[Michael Smith, Analyst]

Okay. And do you think -- in terms of modeling 2018, do you think it's reasonable for us to assume that we'll see more of the same, in other words, steady performance on FFO, NOI and those -- AFFO?

[Naomi Marie Stefura, Chief Financial Officer and Corporate Secretary]

That's a tough question to answer. I think, realistically, Michael, we do see a fair amount of pressure on releasing rates slightly lower. So I probably wouldn't be extremely optimistic in saying that they will stay exactly on trend. There is a risk of seeing a bit of a decrease in terms of occupancy and rental rates, which will negatively impact FFO and AFFO going forward, granted that should be tempered by the vend-in of the Melcor properties that we did in January. So it's a bit of an in and an out.

[Andrew John Melton, President & CEO]

If I could just add to that comment though. Again, I can't predict the future, but what we are seeing earlier in this year is the phone is ringing more often, and we're getting more calls and we're running more tours. And we actually have had a couple of tenant renewals, which we're in the process of completing where the tenants have actually expanded. So it's not -- I don't know. There's a chance that things are a little bit better than we're thinking they might be at this point.

[Michael Smith, Analyst]

So you're finding the tone is a lot more positive than it has been, let's say, 12 months ago?

[Andrew John Melton, President & CEO]

Yes.

[Michael Smith, Analyst]

Not surprising given where oils come, I guess.

[Operator]

There are no further questions registered on the phone lines at this time. I do apologize. We have just had another question queue up from Jenny Ma with Canaccord Genuity.

[Jenny Ma, Director & Real Estate Analyst]

I just have a quick question. I know your regional retail portfolio isn't huge, but a lot of your larger peers have contemplated intensification through particularly rental apartment. Is that something you guys have explored at all? And I recognize the portfolio is a lot smaller and not necessarily in the largest centers in Canada. But have you discussed it? And is there any possibility of densification down the road?

[Andrew John Melton, President & CEO]

The other thing about our retail portfolio, Jenny, is it's somewhat newer. So we're not at the functional obsolescence of any of the assets. We're right sort of at the beginning of the -- of its cycle. But interestingly enough, there is one situation that we are actively investigating the potential of residential densification. We're early in the game, but you asked the question so that you want -- the answer is yes, there is a potential.

[Jenny Ma, Director & Real Estate Analyst]

And that, I assume, would be either Edmonton or Calgary.

[Andrew John Melton, President & CEO]

Correct.

[Jenny Ma, Director & Real Estate Analyst]

Okay. And that would be something that Melcor Developments could -- would it be within their capability to undertake? Or would you consider a partner in densifying?

[Andrew John Melton, President & CEO]

To answer the question directly, Melcor definitely has the ability to do it, but we would consider a partner if the right partner were to come along. Melcor is pursuing it on their own at this particular point in time.

[Jenny Ma, Director & Real Estate Analyst]

Okay, okay. I guess, I will stay tuned for that.

[Operator]

There are no further questions registered at this time.

[Andrew John Melton, President & CEO]

Thanks, Elena. And just wanted to thank everybody for joining us today. And we just look forward to continually working with you on this journey we're on and just hope the next 5 years doesn't go as fast as the last 5 years. So have a great day, and thanks for your support.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.