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 Third Quarter Results Conference Call [Operator Instructions] This call is being recorded on Thursday, November 1, 2018.I would now like to turn the conference over to Ms. Pamela McLean, Chief Financial Officer. Please go ahead.

[Pamela J. McLean, Vice President]

Thank you very much and welcome to our Q3 call.Rai Sahi, CEO, is on the call today but has asked me to do introductions. Joining me are John Ginis, our Director of Asset Management for Retail; as well as Arjun Chowdhury, our Director of Asset Management for Office and Industrial.Prior to turning the call over to Rai and opening for questions, I will provide a financial and property overview. The property overview will be embedded with the financial commentary and property commentary where and when it supports the conversation.Real estate property balances have increased $47.8 million since December 31, 2017. Capital investment of $49.4 million is offset by a decrease in market value adjustments of $0.8 million and a disposition due to the expropriation of lands at Place Innovation of 1.2 million. The expropriation was necessary for the completion of the LRT.The $49.4 million of capital expenditure includes productive capacity maintenance expenditure of approximately $14.9 million, with the remainder representing expenditures on a number of strategic projects.Since January 1, 2017 the trust has delivered 440,200 square feet of new or remerchandised area. Included in this area is 9,700 square feet of new leasable area at Market Square that became income-generating during this quarter along with 126,800 square feet of remerchandised former Target space at Cambridge Centre.At September 30, 2018, the trust had an additional 396,000 square feet of area, which is expected to either remerchandise 359,000 square feet or add 37,000 square feet of new leasable area.The trust's debt ratio at September 30, 2018 was 44.7%. This is largely unchanged from December 31, 2017 when the ratio was 44.5%.During the quarter, the trust completed its refinancing of Cambridge Centre for a term of 5 years and 10 months at a rate of 4.06%. The original loan matured on June 1, 2018 and had carried an interest rate of 3.19%. There were no additional proceeds from this loan.Also during the quarter, the trust completed the refinancing of Centre at Circle and Eighth. The existing mortgage matured on May 1, 2018 with an interest rate of 6.9%. The new loan is for 15 years with an interest rate of 4.506%. The new loan of 72.5 million provided the trust with additional proceeds of 57.7 million. The additional funds from The Centre financing were used to pay down bank lines. And subsequent to September 30, 2018 a portion was used to pay down $25 million on our facility with Morguard Corporation.Finally, during the quarter, the trust increased its operating facility with TD by $15 million. The increase in the facility recognized the increased value of the secured asset.Turning to the income statement. Income before fair value gains and net income from equity-accounted investments was $22.1 million for the 3 months ended September 30, 2018 versus $22.4 million for the same period ended 2017. The difference of $0.3 million is largely the result of increased interest expense and increased other expenses of $0.1 million each.Net operating income for the 3 months ended September 30, 2018 versus the same period ended September 30, 2017 was largely unchanged. However, the trust development program increased net operating income by $0.6 million. During the quarter, 136,500 square feet of development projects moved to income-producing property. Favorable variances in step rent and lease cancellation fees also increased net operating income by $0.6 million. These favorable variances were offset by a decrease in same asset net operating income of $1.2 million, largely in the trust retail portfolio; increased vacancy of $1 million including $0.4 million of the former Sears space combined with lower rental rates to reduce NOI of $1.6 million. This unfavorable result was offset by an increase in NOI of $0.4 million in the trust office portfolio, where leasing resulted in a 1% decrease -- increase in occupancy.Diluted FFO per unit for the 3 months ended September 30, 2018 was $0.35 per unit compared to $0.36 per unit for the same period ended 2017. With respect to diluted adjusted funds from operations per unit for the 3 months ended September 30, 2018 was $0.26 per unit versus $0.27 per unit for the same period ended 2017.The trust continues to use a sustainable reserve for maintenance capital and 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 September 30, 2018 was $8 million. Total for the 9 months ended September 30, 2018 was $14.9 million.I will now turn the call to Rai.

[Kuldip Rai Sahi, Chairman, President & CEO]

Thank you. Can we open for question and answers now?

[Operator]

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

[Jonathan Kelcher, Analyst]

First question is just on the enclosed malls. Can you maybe give us a little bit of color on the renewals that you did in the quarter? It seemed to be down quite a bit over the expiring rents.

[John Ginis, Director of Asset Management]

Are you talking about the rents achieved or the GLA renewed?

[Jonathan Kelcher, Analyst]

The rents achieved.

[John Ginis, Director of Asset Management]

So the rents achieved is a function of -- it varies from asset to asset. There are some specific assets that had a difficult leasing quarter in terms of renewals, but for a majority of which, leasing momentum is starting to pick up at some of our enclosed centers. So I would consider it more of an outlier than anything.

[Jonathan Kelcher, Analyst]

Okay, and for -- so that -- then for the 290,000 square feet or so you have left this year, what would your expectations be on renewals for that?

[John Ginis, Director of Asset Management]

I would assume flat or slightly above.

[Jonathan Kelcher, Analyst]

Okay. And then just secondly, the 2 developments or redevelopments that you have coming on stream in Q4 this year, how much NOI should we expect for Q4 from those?

[John Ginis, Director of Asset Management]

So the developments, I think, you're referencing, is it the 126,000 square feet at Cambridge as one of them?

[Jonathan Kelcher, Analyst]

No, I think that was on -- or at least partially in Q3. I think Shoppers Mall, 46,500 and just the 7,000 at Pine Centre Mall.

[John Ginis, Director of Asset Management]

So the 7,000 square feet at Pine Centre Mall, that's a pad development, that one will generate -- sorry, I'm just getting my math here, about $200,000 annualized worth of NOI. The Shoppers Mall incremental space that's coming on stream, that's the Brandon space left over from the redevelopment of former Target store, largely attributable to 2 tenants, Shoppers Drug Mart and Ardene. That will generate approximately $750,000 of NOI contribution.

[Jonathan Kelcher, Analyst]

Annually?

[John Ginis, Director of Asset Management]

Annually, yes.

[Operator]

[Operator Instructions] Our next question is from Sumayya Hussain from CIBC.

[Sumayya Hussain, Associate]

Just on the office and property numbers, there seem to have been some kind of impact from the timing of a nonrecoverable expense. Do you guys have a sense of what the same property number would have been excluding this expense?

[Kuldip Rai Sahi, Chairman, President & CEO]

Who was that question addressed to?

[Arjun Chowdhury, Director of Asset Management]

It's for the office. Just give us a minute. We'll get back to you in a second.

[Sumayya Hussain, Associate]

Yes. No worries.

[Pamela J. McLean, Vice President]

Is this from the same assets or in...

[Arjun Chowdhury, Director of Asset Management]

Can you be a bit more specific what you're referring to in your question?

[Sumayya Hussain, Associate]

Yes, just looking at the office segment's overall same property number for the quarter, there was some language about the positive impact of a nonrecoverable expense and the timing around that. I just wanted to see, excluding that, what growth you would have seen in the office segment for the quarter?

[Arjun Chowdhury, Director of Asset Management]

Okay, can we get back to you on this?

[Sumayya Hussain, Associate]

Yes, for sure.

[Operator]

Your next question is from Pammi Bir from Scotiabank.

[Pammi Bir, Analyst]

Just in terms of the upcoming renewals, maybe looking into 2019, are there any larger renewals or areas of concern in either the office or retail portfolios or geographically that you're thinking about at this stage?

[John Ginis, Director of Asset Management]

Okay, I'll speak first on the retail, Pammi. With all the GLA that's up for renewal next year, there's nothing that would indicate a cause for concern in terms of tenants not wanting to renew. In some cases, we're receiving some good feedback from tenants in so far as their reinvestment in their spaces. So we don't see any material risk on the retail side of space coming back to us.

[Arjun Chowdhury, Director of Asset Management]

Thank you, John. I'll comment a bit about the office side. So for 2018 the remainder, we don't have any expirations coming up of any material nature. For 2019, for the multitenant buildings, I don't have any expiration over 10,000 in 2019. It's pretty widespread across the portfolio. And as far as the single-tenant buildings are concerned, I have 2 expirations which are over 25,000 square feet each. And we are currently in talks with those tenants for renewal.

[Pammi Bir, Analyst]

So does it feel like from an occupancy standpoint in retail that it's stabilizing here? Obviously, the Sears issue is -- you'll be lapping that in 2019. So do you feel like you're sort of closer to the bottom, that we should expect same property NOI growth next year to start to turn the corner?

[John Ginis, Director of Asset Management]

Well, I mean, again controlling for Sears, that's the big thing here. It's -- we've had a reasonably good second half of 2018 in so far as tenant demand for space, some of which has been buoyant in select markets. Tenants are starting to come back based on the redevelopment that ensued in some of our shopping centers where we had Target exposure. And we've done a really good job on refitting those boxes. So to answer your question, did we hit the trough in the upswing, the hope is, yes, that we're moving forward in that regard.

[Operator]

There are no further questions at this time.

[Kuldip Rai Sahi, Chairman, President & CEO]

Okay, Pam. Thank you very much, everybody.

[Pamela J. McLean, Vice President]

Okay, thank you.

[Kuldip Rai Sahi, Chairman, President & CEO]

And we shall talk to you next quarter. Thank you.

[John Ginis, Director of Asset Management]

Thanks.

[Arjun Chowdhury, Director of Asset Management]

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.