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Good afternoon, ladies and gentlemen, and welcome to the Morguard REIT Trust -- Morguard REIT Second Quarter 2020 Real Estate Conference Call -- Results Conference Call. My apologies. [Operator Instructions] Also note that this call is recorded today, Thursday, July 30, 2020. And I would like to turn the conference over to your host, Mr. Rai Sahi. Please go ahead, sir.
All right. Thank you. Thank you. Okay. You go ahead now.
Okay. Thank you. Just as a point of introduction, my name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. I'm joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Vice President of Western Asset Management; Tullio Capulli, Vice President of Eastern Asset Management; along with Rai Sahi, CEO and Chairman of the Board. Thank you all for taking the time to join the call.Before we jump into the call, I would like to point out that our comments will mostly refer to the Q2 2020 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on this call.To start with, it is important to acknowledge the impact of COVID-19 and the resulting pandemic. We are continuing to take action to mitigate the effects of the pandemic on our business operations, while also focusing on the impact on our staff, tenants and other stakeholders. Governments have reacted to the pandemic with interventions intended to stabilize economic conditions. The duration and the impact of the COVID-19 outbreak is unknown at this time, although there are definitely some encouraging signs within Canada and then particularly in the west.The trust diversification across the country and across the retail and office asset classes helps to lower the risk with the pandemic. The pandemic has been most impactful to our retail assets and in particular, to our enclosed regional malls. Our strip malls, which are largely grocery-anchored, have held up well over the last quarter. The trust has 7 enclosed malls across Canada, 6 of these were impacted by nonessential business closures during the quarter, resulting in periods where certain tenants were not allowed to operate.The reopening of the various economies across Canada has been closely tied to whether the virus is considered to be under control. Nonessential business orders were lifted to various degrees in the Western provinces in May, and the traffic in those enclosed malls are reflective of these earlier dates, with traffic patterns ranging from 75% to 90% of normal in these malls. Traffic patterns in Ontario malls are less, reflecting the lag and when the orders are lifted here as compared to the Western provinces.Collections across all asset classes during April, May and June have been approximately 70%. Collections for July are expected to end the month at approximately 75%. Retail collections have been improving month-by-month, with collections at our Western malls significantly surpassing the collections in Ontario malls. This is an encouraging sign as our rent collections are increasing with more tenants opening up and traffic getting back to approaching normal. Our office collections will be protected in the future due to the fact that approximately 1/4 come from government tenants.Morguard has decided to participate in the CECRA program and believes that supporting its small business tenants is an important initiative during these troubling times. While somewhat complicated, the CECRA program provides rent relief to small business tenants across the country for April, May, June and July.There are certain qualification criteria for tenants, such as having a 70% decline in revenue for the quarter. This program establishes a mechanism whereby the federal and provincial government will cover 1/2 of the rents for these tenants. 1/4 of the rent is also forgiven by the landlord, and the other quarter is paid by the tenant. Morguard is currently working through these applications and will be filing in August on behalf of its tenants.There are approximately 300 tenants applying to the program for the REIT. Management has estimated that the cost of this program will be $1.4 million for the quarter or $1.9 million, including July. There's approximately $4 million in gross rent arrears outstanding in relation to this program for the quarter ending June 30, 2020.Morguard is working through the administrative burden of this program, which has been placed on the landlord. Management is also working through rent payment solutions for rent arrears resulting from tenants that are not part of the CECRA program. This is being done on a tenant-by-tenant basis. Deferrals are being offered, whereby tenants can demonstrate a material decline in business. Abatements are being considered when there is severe hardship on the part of the tenant and when there's an opportunity to exchange for improved lease terms.Working through these rent payment solutions is a difficult time-consuming process as every tenant has different considerations and circumstances. Further, most tenants did not want to engage in meaningful dialogue until they had some visibility to both the economic landscape and the CECRA program post shutdown. Of the $24 million in Q2 rent arrears outstanding at June 30, approximately 10% has been collected in July and another 15% has been granted in deferrals.Turning to our bad debts. IFRS requires filers to set aside an allowance for doubtful accounts in regards to the expected lifetime credit loss of accounts receivable. This allowance effectively represents possible negative outcomes down the road for the Q2 arrears. This allowance includes 2 buckets: the portion of small business rents forgiven under the CECRA program, which I have previously referenced to be $1.4 million; and an estimate of all other credit losses on the remaining receivables, which total $4.1 million, for a grand total of $5.5 million booked for the quarter.There has been a number of failed tenants as a result of the current economic recession. Most of these tenants will remain open in our enclosed malls under restructured rents, while some will close. There are a total of 44 locations that management has identified and is currently working with or have worked with in order to determine if restructured rents can be arranged. It is estimated that the majority of these locations will remain open. However, the future impact on revenue is estimated to be in the range of $3 million to $3.5 million on an annual basis.For the 6 months ended June 30, 2020, the trust has recorded $233 million in fair value losses to the portfolio. This includes $171 million in adjustments to the enclosed mall portfolio. In general, cap rates were raised approximately 25 basis points in the first quarter, along with significant changes to cash flow assumptions in the second quarter, such as rental growth, vacancies and credit assumptions. More conservative cash flow assumptions across other asset classes have also been built into our modeling as appropriate.Overall, the second quarter of 2020 was a quarter with results that were impacted by COVID-19 from the allowance of the arrears as well as the impact of the Obsidian rent relief. This has produced declines in both net NOI and FFO metrics on a year-over-year basis. Combined Q2 2020 occupancy rates remain relatively unchanged year-over-year and since year-end at approximately 93%.And now for a quick update on leasing efforts. As of today, we've completed or expect to complete renewals on the vast majority of the 640,000 square-foot retail leasing GLA coming up for renewal in the remainder of 2020. At this point, that is in the range of 90% that is either complete or almost complete. Further, almost 2/3 of the 113,000 in office GLA coming up for renewal has been completed. Management has had ongoing discussions with the provincial government tenant at Petroleum Plaza, which comes up for renewal on December 31, 2020, and we fully expect them to renew as well.Turning to financing and liquidity. The trust has $54 million in liquidity at the end of the second quarter. This is up from $52 million at the end of 2019. Helping to enhance the liquidity position over the next quarter are 2 things: the expected closing of approximately $75 million in upfinancing in the third quarter, along with the sale of a vacant parcel of land for proceeds of $6.8 million. The combined impact of these transactions will be an increase to approximately $136 million in liquidity. The gap financing available for the 77 Bloor Street property is significant and is a major component of the $75 million figure.The trust is curtailing discretionary operating capital spending for 2020, being mindful of COVID-19, and also to a certain degree in 2021, in order to ensure that the capital is preserved. Other work has also been postponed due to governmental orders. Consequently, it is expected that the PCME or our operating capital expenditures for 2020 will be approximately 1/2 of normal amounts for the rest of the year, including Q2.The trust has made good progress with the redevelopment of the former Sears premises at Pine Centre in Prince George, British Columbia. The new wing consists of approximately 76,000 square feet of redeveloped GLA and is anchored by a Winners/HomeSense. Approximately 65% of the space is filled. Other retailers that are now open include a BC Cannabis store. This wing all opened up in the second quarter of 2020. The finalization of some of the remnant space, which includes an additional retailer and some small bay CRU is expected to take until 2021. The development work on the center in Saskatoon has been continuing and is expected to be completed later this year.Wrapping up, we are encouraged by some of the signs that things are returning to normal. In Ontario, most businesses are reopening every day, whereas out west, businesses have been operating for a while now. While the economy and by extension some of the REIT's assets are going through the challenges, we remain positive about a number of aspects of our business. Most of our enclosed malls remain dominant in their geographical area. This fact will still remain once the new normal is achieved. Beyond retail, we have high-quality office buildings in Canada's largest markets. We continue to be positive about our business and the objective of building value for our unitholders.We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions.
[Operator Instructions] And your first question will be from Brandon Rudensky at Royal Star.
I just had a question specifically for what you think the commercial real estate trends are going to be moving over the next decade. What do you think about the retailers that are currently going bankrupt or some of the retailers that aren't going to come back? Something that's been very common in the news is DavidsTea obviously closing all of its locations in the United States, hundreds in Canada. So what do you think was going to be the next-decade trend in terms of how that space is going to be used? Any adaptations? I just wanted to get your thoughts on the next-decade developments, growth, et cetera.
John, do you want to...
Andrew, do you want me to...
Yes, why don't you take that, John?
Okay. Great. It's hard to answer it specifically because if we all knew the future, we wouldn't be here. Retail is an evolving landscape. There, as you -- to your point, a lot of retailers are going through a major restructuring, CCAA's liquidations, reducing their store counts, et cetera. But as Andrew noted during his remarks, we are working with our retailer base. And for the most part, we're doing a good job in terms of retaining some of these stores.Where we get back units, I really can't answer the question insofar as what we do. Clearly, it was built for retail use, and that's what we're targeting. We're out there, busybodies, trying to scrounge up new business on these malls, and that will continue to be the focus. Will the uses evolve over time, new retailers emerge? Absolutely, but it's impossible for me to tell you exactly what it's going to be 10 years from now.
For sure. Yes, for sure, totally understood. I just wanted to get your guys' -- if you guys had any new innovations coming out or new technologies like, let's say, pickup services or maybe apps that you guys were developing, that you want to offer support to your current tenants and that sort of thing.
We're always innovating from an operating standpoint. So we're not remaining behind the curve in that regard. So it's just a work in progress.
Okay. Sure. And on the -- on -- from the retail side, other than that on the industrial side, have you seen an increased demand there considering the rise of e-commerce?
Well, first, this is Rai Sahi. First of all, we don't have that big a portfolio of industrial. At this stage, it's pretty well fully leased. And so we don't really see anything, what is happening on the industrial side.
[Operator Instructions] And at this time, it seems like -- oh, I'm sorry. We do have a next question from Peter Leacock at CIBC Wood Gundy.
I'm just wondering how you feel about the distribution at this time.
What do you mean how do we feel about distribution?
Is it -- do you feel it's sustainable at the level that it's at? I guess that's what I'm after, please.
Well, this is not an easy question to answer, depending on what continues to happen, and you know that we did cut the distribution some time ago. And we just continue to review it, and at this stage, we don't really have a clear view of the distribution levels. Okay?
[Operator Instructions] And at this time, we have no further questions. Please proceed.
Well, thank you very much for attending this. And hopefully, we'll speak to you next quarter. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.