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's Second Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 2, 2018.I would now like to turn the conference over to Pam McLean, Chief Financial Officer. Please go ahead.

[Pamela J. McLean, VP & CFO]

Thank you very much, and thank you, everyone, for attending our call this afternoon. Rai Sahi unfortunately is not available to attend. I do have joining me on the call today Arjun Chowdhury, our Director of Asset Management for Office and Industrial; as well as John Ginis, our Director of Asset Management for Retail.I will provide both the financial and property overview. And the property overview will be embedded with the financial commentary, where and when it supports the conversation.Looking at the balance [Audio Gap] property balances have increased $49.2 million since December 31, 2017. Capital investment of $32.9 million is complemented by an increase in market value adjustments of $16.1 million. The $32.9 million of capital expenditure includes productive capacity maintenance expenditure of approximately $6.8 million, with the remainder representing expenditures on a number of strategic projects. Since January 1, 2017, the trust has delivered 303,700 square feet of new or re-merchandised area. Included in this area is 13,000 square feet of new leasable area that became income generating during the current quarter. This area is tied to the shoppers, malls, new free-standing pad development for a Cara brand restaurant. The area was 39.3% occupied at June 30. At June 30, the trust had an additional 540,000 square feet of area, which is expected to either re-merchandise 493,000 square feet or add 47,000 square feet of new leasable area. 352,000 square feet of these projects under development will start generating income in Q2 of 2018 and continue through Q2 of 2019. The trust has secured commitments on 65% of this re-merchandised area and 84% of the area under intensification. The remaining 188,000 square feet requires the re-merchandising of the former Sears space at the ground floor Seymour and Pine Centre. Complete plans for this area are yet to be determined. Part 12 of the trust MD&A provides a full reconciliation of all gross leasable area for the properties, including area either held for -- held or for under development for this and the previous 7 quarters. The trust debt ratio at June 30, 2018, was 44.1%. This is largely unchanged from December 31, 2017, when the ratio was 44.5%. During the quarter, the trust took advantage of the increased value at Woodbridge Square and along with our co-owner increased financing on this asset. The trust share is $6 million. This new loan will mature with our existing loan on April 1, 2023. The new financing carries an interest rate of 3.65%. We continue to work with our incumbent lender at the center to increase financing. We have extended the current loan into August of 2018. The current outstanding mortgage balance is approximately $15.3 million and carries an interest rate of 6.9%. Discussions with the incumbent lenders support an increase in financing of approximately $57 million. The increased interest expense associated with the increased financing is expected to commence late in Q2. The interest rate has yet to be confirmed but will be better than the current rate of 6.9%. On July 1, 2018, approximately 50% of our financing on Cambridge Center matured. This loan has also been extended where we finalized an opportunity with the incumbent lender. Management expects to extend the full amount of the maturing mortgage with no increase, to mature in 2024 along with the remaining 50% of the outstanding mortgage. The current interest rate is 3.19%.Moving to the income statement. Income before fair value gains and net income from equity accounted investments was $22 million for the 3 months ended June 30, 2018, versus $23.3 million for the same period ended 2017. This represents a decrease of $1.3 million. The decrease is largely due to a $1.1 million decrease in net operating income. NOI for the 3 months ended June 30, 2018, was $36.9 million versus $38 million for the same period ended June 30, 2017. During 2017, 290,700 square feet of area under development started generating revenue. This space related to the trust projects at 4 of our regional enclosed shopping centers and for community strip. During the current quarter, the additional 13,000 square feet became revenue generating. Additional NOI from these developments -- from these development projects increased net operating income during the quarter $1.4 million, an increase of $1.0 million for the same quarter of 2017. However, this increase was offset by reduced net operating income elsewhere in our retail and office portfolios. Same property net operating income was unfavorable $1.9 million. The unfavorable same property net operating income derived from the enclosed regional shopping centers of $1.3 million, where increased vacancy combined with decreases in basic rent. As reported in our MD&A, included in NOI, is an increase in the recovery of prior-period maintenance expenditures of approximately $300,000 for the 3 months ended June 30, 2018, versus the same period ended June 30, 2017. Late in Q2 and subsequent, the trust saw an increase in utility costs, largely due to weather conditions across the country and the impacts of the additional development area becoming operational. As a result, should this trend continue, the increase in recovery of prior-period maintenance expenses experienced today may not continue into subsequent quarters. The office portfolio also saw a decrease in net operating income of $700,000. This increase was felt in both Ottawa and Alberta due to increased vacancy. The trust continues to have lease exposure to these 2 markets for the remainder of the year. These 2 negative impacts were slightly offset by improved NOI in our community strip portfolio of 200,000. With respect to funds from operations, diluted FFO per unit for the 3 months ended June 30, 2017, was $0.36 per unit, compared to $0.38 per unit for the same period ended 2017. The decrease in FFO of $0.02 per unit is the result of the reduced net operating income. Our diluted AFFO or adjusted funds from operations per unit for the 3 months ended June 30, 2018, was $0.27 per unit versus $0.28 per unit for the same period ended 2017. The trust continues to use a sustainable reserve for maintenance capital on leasing. The reserve for 2018 is $25 million, or $6,250,000, per quarter and is based on a review of the 3-year budgeted forecasted leasing and maintenance capital. Actual expenditures for productive capacity maintenance for the 3 months ended June 30, 2018, was $3.9 million and the total for the 6 months ended June 30, 2018, was $6.8 million.I will now open the call for questions.

[Operator]

[Operator Instructions] Your first question is from Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

Just a couple of quick ones here. First, on the $300,000 prior-period recovery of the utilities, so NOI would have been $300,000 lower with -- without that this quarter?

[Pamela J. McLean, VP & CFO]

Yes. So the $300,000 actually relates to the prior-period recovery of CapEx, which is above what the amount was last year. If the utilities increase that we saw late in Q2, continues into Q3, then we will have to adjust the recovery of the prior-period CapEx. And yes, the potential decrease would be about $300,000.

[Jonathan Kelcher, Analyst]

Okay. And then just secondly on the Cambridge Center, what loan-to-value is currently on that property for the mortgages you're talking about?

[Pamela J. McLean, VP & CFO]

So the mortgage that is maturing is sitting at 53%.

[Jonathan Kelcher, Analyst]

Okay. So you expect just to renew that and I'm sorry, keep going?

[Pamela J. McLean, VP & CFO]

That is correct.

[Jonathan Kelcher, Analyst]

Okay. And lastly, maybe a little bit -- I know it's a very small part of your portfolio, but maybe a little bit of color on the industrial this quarter that was down quite a bit?

[Pamela J. McLean, VP & CFO]

Yes. I'll turn that over to Arjun.

[Arjun Chowdhury, Director of Asset Management]

Sure. So Jonathan, that had to do with an early termination at one of our properties and the space that came back to, this has already been committed to a new tenant, that will commence in Q3.

[Jonathan Kelcher, Analyst]

Okay. So we'll see nice bounce back at that. And how much was that the 82,000 or -- give or take?

[Arjun Chowdhury, Director of Asset Management]

Only the area was much less, it was 16,000 square feet that got impacted by this early termination.

[Operator]

There are no further questions at this time. Please proceed, Ms. McLean.

[Pamela J. McLean, VP & CFO]

Okay. If there's no further questions then we'll say thank you to everyone, and we'll close the call. Thank you.

[Operator]

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