Morguard Real Estate Investment Trust
TSX:MRT.UN
Earnings Call Analysis
Q4-2023 Analysis
Morguard Real Estate Investment Trust
The trust reported a mixed fourth quarter, with flat net operating income (NOI) at $33.4 million, identical to the previous year's figures. Nevertheless, there was an overall 3.1% increase in NOI for the year, reaching $126 million, thanks to a one-time property tax refund and improvements in same-asset retail income. However, funds from operations (FFO) saw a decline of 17% to $15.7 million compared to last year due to increased interest costs on short-term debt. There was also a rise in interest expenses by 22%, influenced by the higher interest rate environment.
A rebound in enclosed mall performance was noted, with more than half of these properties reporting double-digit increases in sales per square foot in comparison to 2019, leading to positive rental growth upon renewals. The office market remains a challenge, particularly in Ontario, yet some regions like the West are maintaining or even increasing occupancy. Around 390,000 square feet in retail and 231,000 square feet in office space is up for renewal in 2024, with expectations for all significant retail and most large office tenants to renew their leases. Moreover, the trust is actively engaging tenants with around 525,000 square feet of space becoming available in 2025 at Penn West Plaza.
Penn West Plaza remains substantially occupied, with a 90% to 95% occupancy rate. Although no detailed plans were shared for renewing leases, an estimated annual NOI adjustment ranging from $10 million to $15 million is anticipated due to lease rate resets.
The rezoning application for a significant property, necessary for redevelopment options, has been an ongoing process since 2017 without major breakthroughs. The conceptual plan for this property includes six towers over two phases, although first reading approval is not expected until sometime in 2024. This indicates a longer-term view on the property's redevelopment, with a focus on securing entitlements for now.
The company acknowledged that its net asset value (NAV), ranging from $15 to $16, is heavily discounted in the stock market, roughly by 70%. Similar to other real estate entities, the trust has little control over market perceptions. No share buybacks occurred in the past year despite the discount, but the executive team is evaluating all options while focusing on various unspecified priorities.
Retail has experienced a strong 20-month rebound, with quarter-over-quarter growth observed in the trust's retail portfolio. The resurgence of consumer spending in malls has been substantial; however, uncertainty surrounding the general economy's direction prompts a more cautious outlook for 2024. Retail, given its irreplaceable nature and the high cost of construction, continues to attract retailers to existing malls, signaling continued potential for growth albeit with careful optimism for the coming year.
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Good afternoon, ladies and gentlemen, and welcome to Morguard Real Estate Investment Trust Fourth Quarter for the Year ended December 31, 2020 Conference Call. At this time, presentation, will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, February 15, 2024. I would now like to turn the conference over to Andrew Tamlin, Chief Financial Officer. Please go ahead.
Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's Fourth Quarter 2023 Earnings Conference Call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Senior Vice President of Western Asset Management; and Todd Febo, Vice President of Eastern Office Management. 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 fourth quarter 2023 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. Overall, we are again pleased with the fourth quarter results, which were slightly mixed in their tone, but are pleased with the levels of leasing momentum we are seeing. Net operating income for the quarter was flat at $33.4 million as compared to $33.5 million last year due to steady net operating income results in the retail asset loans. Broken down by asset class, both retail and office were flat for the quarter as compared to a year ago as well. Net operating income for the year ended December 31, 2023, increased 3.1% to $126 million from $122.2 million, due both to the increase in same asset retail income plus a onetime property tax refund received in the first quarter for one of the trusts and closed regional centers in the amount of $2.8 million. This related to vacant space and past failed tenants such as Target. FFO for the quarter decreased 17% to $15.7 million in 2023 as compared to a year ago due to higher interest costs on the trust short-term or variable rate debt. Same asset net operating income for the fourth quarter declined 1% due to a decline in multi-tenant office income resulting from higher vacancy. For the year, our same asset net operating income increased 1% from our retail results. Interest expense has increased 22% to $17.2 million for the quarter on a year-over-year basis. The impact of $12 million lower debt on a year-over-year basis has been offset by higher short-term borrowing costs due to the higher interest rate environment that we find ourselves in. Higher interest costs on renewals of mortgages have also been a factor. The trust is approximately 19% of its debt is variable at December 31, 2023, which is up slightly from approximately 18% from a year ago. The trust will continue to monitor this and would expect to see it somewhat elevated in the near future. Our enclosed mall results continue to rebound from the downturn we saw under COVID. We are continuing to see increases in sales per square foot on a year-over-year basis and a quarter-over-quarter basis. In the fourth quarter, we have seen more than half of our enclosed malls have double-digit percent increases in sales per square foot as compared to 2019. Pine Center in Prince George, Shoppers Mall in Brandon, Saint Laurent, Ottawa and the Center in Saskatoon are all seeing these increases. This has led to positive rental growth upon renewals for tenants at our enclosed mall assets. We are continuing to see a bounce back of the performance of these assets. During the quarter, we had a $43 million fair value loss on our real estate properties, which was attributable to a 25 basis point increase in cap rates for our office asset portfolio. This compares to $113 million fair value loss for the quarter a year ago. The REIT's PCME or operating and leasing capital reserve was established to be $25 million for the year. Actual spending was $36 million, which was anticipated due to enhanced leasing capital this year and some catch-up maintenance capital deferred under COVID. We are still expecting elevated capital needs above the reserve amounts in future quarters into 2024. Our overall occupancy level of 90.3% at December 31 is relatively unchanged from last quarter and down slightly from 90.6% a year ago. This decline is all attributable to the softness in the office market, which continues to see its challenges. We are seeing this downturn primarily in our Ontario office assets, where our office assets at West are holding occupancy or even increasing. And now for an update on our leasing efforts. In 2024, there's approximately 390,000 square foot -- square feet in retail GLA and 231,000 square feet in office GLA coming due. We do expect that every retail tenant larger than 5,000 square feet to renew their space. We also believe that every office tenant greater than 5,000 square feet to renew with the exception of 1 5,000 square foot tenant that is expected to vacate. Looking ahead to 2025, I note that we have 525,000 square feet in space at Penn West Plaza coming due. We are actively working with these tenants to determine their needs beyond the state. Presently, we've renewals for more than half of this space, and we're having good conversations with all tenants. This will become a multi-tenant building at that point. We will be providing further updates on these renewals in future quarters as these discussions get sorted out and continue. Leasing discussions for both office and retail opportunities have definitely picked up in the last year as both current and prospective tenants now have a better handle on what to expect going forward post pandemic. This has led to numerous conversations about various opportunities at our properties across the country. Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal back on December 31, 2020, and is now in our overhaul. We have recently had some better back-and-forth discussions, but this is still going slowly. Turning to financing and liquidity. The trust is $101 million in liquidity at the end of the fourth quarter, which is down from $121 million at the end of 2022. From a financing perspective, during the fourth quarter, there was a scheduled paydown of $8 million from the Penn West Plaza renewal completed a year ago. And further, there was a $30 million paydown required for renewing a mortgage audited Cosmo. There are no mortgage renewals until Q2 of 2024 or further mortgage renewals. From a development standpoint, we are especially pleased with the results from Pine Center in Prince George, British Columbia. This mall now has a new Save-on-Foods grocery store, which is opened at the end of September. That has led to other leasing opportunities in this mall, including lululemon, Sephora, H&M and others. The addition of grocery further complements the strong anchor tenant profile at this mall. The trust has also announced a remerchandising and development project at St. Laurent. This is intended to strengthen the tenant mix and promote long-term growth through targeted investment in discriminatory retailers. This cost is expected to be approximately $13.5 million and is expected to take 24 to 36 months to complete. The Trust is continuing to have conversations with these new tenants for the mall and also existing tenants with possibly expanded space. Wrapping up, we are pleased that the resiliency of our assets and the improved results and activity levels from our enclosed mall and retail segment. We are pleased with the positive results we've seen in the last year. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have performed well. Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about their 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'll now open the floor to questions.
Thank you. [Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD Cowen.
Thanks. First question, I guess, just on retail, January -- December, January, February kind of that time of the year. Is there anybody on your -- any tenants on your watch list?
Jonathan, it's John here. The only one that we're trying to pay attention to is the bank. You saw, I'm not sure if the headlines that you follow that would suggest that they will show paying their suppliers in the fall of last year. And also, they were also [ showing ] some landlords or late on their payments for rent over the last few months, us included. So in terms of larger format tenants, that's the one we're trying to pay attention and see what happens over the course of calendar '24. But apart form that, there's nothing that stands up and suggests that there's an imminent restructuring or something to that effect.
Okay. And then -- so nothing, that's good. That is good. And then just on Penn West Plaza, and I know you talked a little bit about it, but how at least for the whole building comes up February next year? How full is that building? How much subleasing has subsided?
So the building is actually pretty full right now. It's in the range of 90% to 95% occupied. So there's a real good mix of subtenants that are there now, and we've had good conversations with a lot of them, and we're continuing to have conversations with the rest. So I think that the plan is to continue with that and provide further updates on how those are going in future quarters, Jonathan.
Okay. But I think it's fair to say there will be some sort of NOI roll down beginning in Q1 next year.
Yes, there will be. It's probably in the range of $10 million to $15 million adjustment [indiscernible] of operating income.
Annually?
Yes, annually. And that's just really from the reset of all the lease rates.
Okay. And then lastly, just on the Burquitlam Plaza. Can you maybe give a little bit of color on that, maybe the timing on the application you have and how long you could do that and maybe what you plan on doing with the property after that goes through?
Jonathan it's John again. So we have been immersed in a rezoning process for that property for years now stating back to 2017, 2018. We're trying to get the first reading. There's 4 reasons necessary in order to get a property results before that would then permit us to rebound an option on the asset. It hasn't been easy, but notwithstanding the conceptual plan calls for the [ direction ] of 6 towers over 2 phases. But again, we don't want to speculate here. In the end of the day, the first thing is to get the rezoning done, and our hope is that we get the first reading at some point in 2024.
Okay. So that's still ways away.
Yes. I would just add. I mean there's been challenges with agendas of certain counselors and just similar challenges to other developers that are trying to push forward projects these days. So it's not really that uncommon. We still feel good about getting the approvals. It's just going to take time. And beyond that, we don't really have any set plans as far as how we're going to move ahead with the development. We're just focused on the entitlements for right now.
[Operator Instructions] Your next question comes from the line of Charles [indiscernible] from Charles Investments.
My first question is about your net asset value. Could you please tell me what is it now, please?
It's in the range of $16. $15, $16.
Okay. So us -- of the business, when you see your net asset value is so highlight this on a consistent basis for this particular company. And when you compare these prices to how much your share prices work? And I think it's almost 70% discounted.
Sorry, is there a question there? I'm not sure I caught that.
Yes. So net asset value is heavily discounted in the market based on the price of your stock. I'm saying, does that -- like are you concerned -- where do you see that? For example, the fact that your net asset value is not showing -- is not properly assessed by the market.
Well, I think we've been challenged similarly to other real estate companies and real estate trusts. So we have little control over what the market is doing these days. A lot of the -- a lot of our peers are also struggling from a share price perspective. And we're obviously monitoring that, but there's limited opportunity that we can do to impact that.
Well, I think for this particular company, I've been with you guys for so many years, [ I bet it has ] always been like this. This company always [indiscernible] at a very massive discount to islet asset value even before the pandemic. And that brings me to the question of, why don't you buyback your shares? Like for the whole of last year, not a single share was bought back by the company. What was the reason for that?
Well, we will look at that. Where we evaluate all opportunities. And for now, we're focused on a number of different things, and we'll consider that going forward.
Well, you don't need to [indiscernible] this . It is something that you should do. If you truly believe your net asset value, it's $15, right, as you said, you can buy it back at less than $5 and [ 5% ] or $.40. Why don't you do that? That gives more value to your money. You know what I'm saying, like this happens a lot for this company. And you said like...
We need -- Operator, I think we need to move on. This isn't a productive conversation.
No, no. I said it with you, it is productive.
And your next question comes from the line of Tom Callaghan from RBC Capital Markets.
Just wanted to switch back to the retail side of things. You talked a bit about it in your prepared remarks there. But just curious where you think retail leasing spreads could fall in 2024? And more broadly, what do you guys think is reasonable in terms of same property performance within that asset class?
Tom, it's John. So the last 20 months have been pretty good in terms of retail rebound. Andrew, obviously touched on that in his remarks. We've seen central results. with quarter-over-quarter same asset growth in our retail portfolio. And really, no one really knew how they were going to come out with the pandemic. So clearly, we came back strong, which is encouraging. There's nothing that we foresee that would stop consumers from continue to [indiscernible] malls. The only real outlier or concern we have is where the general economy goes. And that's something that we're obviously paying attention to. But it varies depending on the lease spread you're talking about. Andrew, again, noted during these remarks about certain assets like I've said are less than Prince George, where there's been exceptional growth and demand from retailers that you want as part of your [indiscernible] and tenant roster, but it's not uniform across the country. In terms of leasing spreads, the good news about retail is it's irreplaceable. And given where construction costs are today, what retailers are doing is they're trying to survey the market to find opportunities and where they can't build because it's too expensive. They look at existing spot, hence, the demand is coming back into the malls. So we feel pretty good about it. The last 2 years have been great, but we'll be more cautious for calendar 2014.
I would just add, Tom, that we have seen positive leasing spreads now for a good chunk of time, both for the quarter itself and for the year. I would expect that we would see positive same-store results for the retail segment. What that exactly looks like. It's tough to know, but we feel good about retail.
Thank you. And there are no further questions at this time. I would like to turn it back to Andrew Tamlin, for closing remarks.
Okay. Thank you, everybody, for joining the call, and we'll look forward to chatting with everybody next time. Thank you.
Thank you, presenter. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.