Morguard Real Estate Investment Trust

TSX:MRT.UN

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust 2024 First Quarter Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 2, 2024.I would now like to turn the conference over to Mr. Andrew Tamlin. Please go ahead.

[Andrew Tamlin, executive]

Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's First Quarter 2024 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 Febbo, Vice President of Eastern Office Asset Management. Thank you all for taking the time to join the call.Before we jump into the call, I'd like to point out that our comments will mostly refer to the first quarter 2024 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 first quarter results, which saw strong increases in same-store net operating income growth across all asset classes, which is consistent with the levels of leasing momentum that we are seeing.Net operating income for the quarter was down slightly at $30.9 million as compared to $31.5 million in 2023 due to a onetime property tax refund received last year in the amount of $2.8 million. If this prior year amount is excluded, our net operating income increased by 8% or more than $2 million. Same asset net operating income for the quarter increased a healthy 5.3% due to increases in all 3 asset classes. Retail results continue to do well as traffic and sales in our enclosed malls continue to improve post-COVID. Office results saw a 3% increase in same asset net operating income due to increased leasing activity in the trust's Alberta assets.Interest expense increased 15% to $16.9 million on a year-over-year basis. Higher interest costs on rollovers of mortgages in the last year have been a key reason for this increase. The trust has approximately 20% of its debt as variable at March 31, 2024, which is up slightly from year-end. The trust will continue to monitor this, and we expect to see this number decline in the second quarter as we work towards converting some of this variable rate debt to fixed in addition to paying off some.FFO for the quarter decreased 18% to $13.4 million in 2024 as compared to $16.3 million a year ago due to higher interest expense, as just referenced and the onetime $2.8 million property tax refund. Our enclosed malls continue to perform and do well. We are continuing to see increases in sales per square foot on a year-over-year basis and a quarter-over-quarter basis. For example, our sales per square foot for our 7 malls are on average close to 15% higher than pre-COVID numbers. This has led to positive rental growth on renewals for tenants at our enclosed mall assets and a continued trajectory of a bounce back of the performance of these assets.During the quarter, we had a $50 million fair value loss on our real estate properties. These adjustments were focused around expanded cap rates for some of our enclosed malls as well as some of the REIT's B.C. office assets. PCME, our operating and leasing capital reserve, was established to be $25 million for the year or $6.25 million for the quarter. Actual spending was $6.5 million for the quarter. We are expecting elevated capital needs above the reserve amounts as we move further into 2024 due to increased leasing capital needed, particularly for office deals and further catch up on operating capital from COVID.Our overall occupancy level of 90.3% at March 31, 2024, is 60 basis points higher than a year ago. Retail occupancy is up 80 basis points, and office occupancy is up 50 basis points. Looking specifically at our enclosed malls, occupancy is up 160 basis points from a year ago, with every mall posting improved occupancy numbers over that time frame. The increase in office occupancy is driven by increased leasing activity at our Alberta assets, in particular, our suburban Calgary assets.And now for an update on our leasing efforts. In 2024, there's approximately 230,000 square feet in retail GLA coming due and 101,000 square feet in office and 84,000 industrial GLA coming due over the last 9 months of the year. We expect that every tenant larger than 5,000 square foot to renew their space and are positive about the remaining leasing activity necessary for the rest of the year.Looking ahead to 2025, I note that we have approximately 500,000 square feet in space at Penn West Plaza coming due. We are actively working with these tenants to determine their needs beyond this date. Presently, we've got renewal commitments for approximately 70% of the building and are having good conversations with certain other tenants. This will become a multi-tenant building at that point.At this point, we expect a decrease in net operating income of approximately $14 million to $15 million in 2025 due to the lease-up and vacancy costs as the rents in this building get reset to market rates. However, we expect an approximately $5 million improvement in 2026 and future years as we move past the initial lease-up period.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 on December 31, 2020, and is still in overhold. While we have recently had some better back-and-forth discussions, this is going slowly and at this point, there is still no resolution to report.Turning to financing and liquidity, the trust has $88 million in liquidity at the end of the first quarter, which is down from $101 million at the end of 2023. From a financing perspective, it was a pretty quiet quarter. However, looking at the rest of 2024, we are looking at a number of renewals that will be coming up in the second quarter of 2024. There will be minimal opportunities to procure our financing for these renewals and the rest of the renewals in 2024.We now have a binding arrangement for the sale of Heritage Towne Centre, which is a non-grocery strip mall based in Calgary. We expect to have net proceeds in the range of $19.5 million after payout of the $17 million mortgage when this transaction is completed in the second quarter. The proceeds will be put towards paying off lines of credit.Wrapping up, we are pleased with the resiliency of our assets and the improved results in the activity levels from our enclosed mall and retail segment. We are especially pleased with the positive same asset results we've seen so far this 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 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]

[Operator Instructions] Your first question comes from Jonathan Kelcher with TD Cowen.

[Jonathan Kelcher, analyst]

First question, just on the -- just a little clarity on this. But on the enclosed regional centers, it looks like the renewals were -- the renewal rate was well below the expiring leases. I'm just wondering -- looking for a little bit of color on that.

[Andrew Tamlin, executive]

So you could chalk that up to the seasonality of the business, Jon. So there's typically a high degree of Christmas type tenants that fall off the roll. So that's to be expected at this time of the year.

[Jonathan Kelcher, analyst]

Okay. So if I look -- if I were to look at that on an apples-to-apples basis, what sort of -- did you get an increase? And if so, what sort of increase did you get there?

[Andrew Tamlin, executive]

If you back that out, we would probably be flat to a little positive.

[Jonathan Kelcher, analyst]

Okay. That's helpful. And then secondly, just maybe an update on the development of Pine Centre. It looks like the cost on that is a little higher -- or the expected cost is a little higher this quarter.

[Andrew Tamlin, executive]

Well, that's now done and closed out. And yes, there were a few additional costs as part of that project. We are still very positive about that project, though. The new grocery store has led to real good decent conversations with new tenants, such as H&M, which is still open, but that mall is performing well and has a good -- is looking forward to a good 2024.

[Operator]

[Operator Instructions] Your next question comes from Tom Callaghan with RBC Capital Markets.

[Tom Callaghan, analyst]

Andrew, maybe just to start, quick clarification from the opening remarks. I just want to make sure I heard you right in terms of the Penn West Plaza next year. Did you say a decrease now of $14 million to $15 million on an annualized basis next year expected?

[Andrew Tamlin, executive]

That will be a onetime thing. And yes, that will be for next year. There's free rent that's being given out as an inducement. There's also some vacancy as well. So that will bounce back by approximately $5 million when you get into 2026. From an annualized perspective, once you get past next year, probably $10 million is probably a more appropriate number.

[Tom Callaghan, analyst]

Got it. Okay. Perfect. Maybe just on Heritage. Can you just talk a little bit about what led to that disposition, like was that unsolicited or are there other assets in addition to this one that you maybe look to part with here over the next year or so?

[Andrew Tamlin, executive]

It was really just recycling of capital, Tom. That asset is a bit of a high watermark from a net operating income perspective. And we just thought it was appropriate to go ahead and do a bit of a process, and we've now executed on a binding contract. So it's really just recycling of capital.

[Tom Callaghan, analyst]

Perfect. And was there a cap rate on that you can disclose?

[Andrew Tamlin, executive]

It's about 7% to 7.25%.

[Tom Callaghan, analyst]

Great. And then maybe just last one for me in terms of maturities. I know you mentioned no real opportunity for financing, but any sense as to potential paydowns here over the remainder of '24?

[Andrew Tamlin, executive]

We could see some in the fourth quarter, but I wouldn't expect anything until then. So it's a little too soon to talk too much about the fourth quarter.

[Operator]

There no further questions at this time. I will now turn the call over to management for closing remarks.

[Andrew Tamlin, executive]

Thank you, everybody, for joining our conference call, and we look forward to talking to everybody for our second quarter. Thank you. Bye for now.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.