Plaza Retail REIT
TSX:PLZ.UN
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
3.49
4.275
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
This alert will be permanently deleted.
Good morning, ladies and gentlemen. Thank you for standing by. I would like to welcome everyone to the Plaza Retail REIT First Quarter 2018 Earnings Conference Call. [Operator Instructions] I would like to advise everyone that this conference call is being recorded.I will now turn the conference over to Mr. Michael Zakuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zakuta.
Thank you, operator. Good afternoon. Thank you for joining us on our Q1 2018 results conference call. I'm legally obliged to tell you that today's discussion includes forward-looking statements. We'd like to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainty and other factors that could cause actual results to differ materially from such statements. Please refer to Plaza's public filings for discussion of these risk factors.We continue to be very positive about our prospects as we grow our business across our geography. We have 13 projects under construction. These projects are located in Ontario, Québec, New Brunswick, Nova Scotia, Newfoundland.Our pipeline is solid and we continue to bring in new opportunities to refill our pipeline as we finish existing projects.Our highlights are as follows: We acquired the 1000 Islands Mall in Brockville for redevelopment. We completed our sale of land to Costco for our Galway development in St. John's, Newfoundland and started site works. We signed an offer to acquire the 50% interest of our partner in Miramichi development -- our Miramichi redevelopment. We will be placing long-term debt on this property to fund the acquisition, so it'll greatly enhance our yield on equity.We are recycling capital at a faster pace than anticipated. Our sale of 8 freestanding small buildings in Alberta, 7 KFCs, 1 Cash Money store is unconditional at a cap rate of 5.33%.Our sale of other noncore assets are also progressing well. We increased our ownership from 10% to 50% in 2 high-quality properties, 1 in Moncton and 1 in Shediac, New Brunswick.We moved along the development cycle, a number of interesting projects in Ontario including a food anchored strip in Oshawa, and our land lease deal with a 70,000 square-foot athletic club in Mississauga.Occupancy levels will be soft for at least another quarter before moving back up to more normal levels at the end of the year. We find ourselves in a very different market environment today. We continue to see historically low cap rate for a variety of retail properties with very strong demand from private investors. At the same time, we experienced real softness in retail repricing, with a variety of REITs offering historically high investment yields.From my perspective, retail REITs appear to present a compelling buying opportunity. I'm having difficulty understanding the disconnect and the magnitude of disconnect between REIT values versus pricing for real estate assets.We trust that you recognize that Plaza is a very proactive property owner. In the quarter, we made several moves that negatively impact FFO and/or AFFO in the near term, but create value in the mid- and long-term. One, we paid early mortgage discharge fees to refinance early a property in order to increase cash flows and lock in a new 10-year fixed term mortgage. Two, we invested funds in leasing costs to bring in new tenants and existing properties in order to drive cash flow in the future. Three, we invested in a new facade to replace an outdated look on a strip acquired in our key REIT transaction. We believe very much in making these types of moves.We have built our business by developing new projects and transforming tired or challenging -- challenged assets. We work hard to make sure that we are the transformer and not the transformee, the transformee being a passive investments by a landlord that does not initiate change in order to keep up their property, whether it is in making leasing and tenant changes or physical improvements to the property.Plaza's business model has always focused on developing or redeveloping new space for value specialty and necessity-based retailers. Over the years, we've built a stable and geographically diversified portfolio to support our monthly distributions to unitholders.In today's investment environment, we offer investors a compelling yield combined with future growth. Going forward, Plaza will continue to pursue its goal of building value for its unitholders and generating per unit growth and will continue to differentiate itself from other REITs.I will now turn the call over to Floriana Cipollone, Plaza's Chief Financial Officer, who'll provide you with a brief summary of our results for the quarter. Floriana?
Thank you, Michael. Partly impacting results for the quarter were: a, 1 month of overlap in interest expense on convertible debentures as the new Series E converts were issued on February 21, while the existing Series E converts were redeemed on March 27; b, 2 significant lease buyouts included in 2017, impacting vacancies; and c, early mortgage discharge fees paid, as Michael already mentioned.Excluding these 3 items that are more nonrecurring in nature, funds from operations, or FFO, per unit was up 0.7% from the prior year, while adjusted funds from operations, or AFFO, per unit was up 1.3% from the prior year. The increase in FFO and AFFO was mainly due to growth from developments, redevelopments and acquisitions, net of property disposal as well as an increase in other income mainly due to an increase in third-party leasing and development fees earned from co-owned properties.AFFO was further impacted by higher-maintenance CapEx and leasing costs related to new tenancies.Total net operating income was up 0.3% for the quarter and up 1.5% for the quarter excluding the impact of the lease buyouts. Total net operating income was impacted by growth from developments, redevelopments and acquisitions, net of property disposals, partly offset by a decrease in same-asset net operating income.Same-asset net operating income was down 1.4%, mainly due to a $150,000 bad debt expense recorded in the quarter due to a tenant going into creditor protection; vacancies from the 2 lease buyouts as previously mentioned, which negatively impact same-asset net operating income by $180,000; and vacancies at enclosed malls. These were partly offset by new lease up and contractual rent increases in the portfolio. The lease buyouts were done in order to bring on other more stable tenants.Excluding the impact of the lease buyouts, the 1-month overlap of convertible debenture interest in the early mortgage discharge fees, our payout ratios were relatively consistent with the prior year at 83% on FFO and 90.8% on AFFO compared to 83.7% and 88.9%, respectively, in the prior year.Our leverage ratios ended the year at 49.4% of assets excluding converts, and 54.3% including converts. As mentioned in our last call, during the quarter we concluded lease renewals on 150,000 square feet or 62 sites with our 2 primary KFC operators. Most of these leases were set to expire this year. The 2 KFC operators have 81 sites and represent 90% of Plaza's total KFC standalone square footage. The renewals have an average rental increase in the first year of approximately 5% and an average least term of approximately 7 years.As well as mentioned in our last call, during the quarter we partnered with the Canadian pension fund to increase our interest and returns in 2 Montcon area plazas. As Michael mentioned, our interest was increased from 10% to 50%, with the pension fund buying the other 50% interest on a co-ownership basis. Both properties were previously co-owned by us through 2 retail syndications. This transaction reflects our strategy to capitalize on opportunities within the existing portfolio and enter into value-enhancing transactions.Finally, also as mentioned in our last call, on February 21, Plaza completed a bought deal public offering of $47.25 million aggregate principal amount of 5.1% unsecured convertible debentures due March 31, 2023. The debentures are convertible into units of Plaza at $5.65 per unit. $34 million of the net proceeds were used to early redeem our Series B 5.75% convertible debentures with redemption that happened on March 27. The remaining net proceeds were used to repay amounts of standing on our operating line and therefore, ultimately, to fund future developments and redevelopments. Those are the key points relating to our financial results for Q1 2018.With that, we'll now proceed to open up the lines for any questions. Operator?
[Operator Instructions] Your first question comes from the line of Jenny Ma from BMO Capital Markets.
Michael, I was wondering if you could talk a little bit about any signs of cost pressures when you're looking at your redevelopment and development properties? There's been a lot of news, headlines, talking about the kinds of pressures that we're seeing in Toronto, but wondering if you can give us some color on what you may or may not be seeing in the markets that you are more focused on?
Yes. It's highly variable, depending on your geography, which markets. So we've had some rough spots in certain Ontario markets, and we've had some pleasant surprises in others. So most recently, we started working in Brockville, where we're under budget. Same thing in Chicoutimi. Elsewhere, I'd say, we will be on budget. So I can't say that there's a definitive trend. It's very, very regional. And if in a region the contractors are very busy, we're going to see higher prices. If they're hungry, we're going to see good prices. We bid our 3 Canada stores in New Brunswick. We got great pricing. We bid stuff in other markets and pricing is challenging. So we're not living the GTA situation, because that's not where the contractor base is from. So I don't see a strong trend one way or the other.
Which markets are you seeing some pressures in? And do you know why that might be the case?
It's some of the smaller markets, where there's just not a lot of supply. And all of a sudden, the costs are higher. We did a little project in Greenwood, Nova Scotia, for example, where we paid more than we anticipated or what we'd pay for same building elsewhere. It's very, very regional from a cost perspective.
Okay. Is there any -- I guess it depends on the size of the project, but if those were to come up, do you have any way of managing those costs by pushing out the time frame? Or do you just sort of go with it? And because it's so variable, it's kind of a wash in the end.
No. We always look and if we're -- if we have cost challenges, then we look at redesign. Yes, sometimes we will delay and have to maneuver and look at some redesign issues and a different approach to the challenging elements. And typically, that though we see it in site works, not in pure building costs. Pure building costs can be relatively consistent. And clearly, as an experienced developer, we live those ups and downs. I don't think there's a magic solution, though. Sometimes you take it on the chin. And then sometimes you work it and you make it.
Okay. That's helpful. And then with regards to the bad debt expense from this quarter, can you give us some more color on that? And also, the timing of when you may think that space gets re-leased? And then if you could just remind me the timing of the 2 tenant buyouts as well as far as the leasing goes at those spaces?
On the 2 tenant buyouts, 1 is partially leased and will be fully leased by the end of the year. And the other one should be this summer. The deal is signed, and it's a question of getting the retailer in the space. As far as…
And just to -- sorry, just for a second. And just to add to that, Jenny. In terms of comparisons to prior year, and I think I may have mentioned this in the last call as well that the lease buyouts happened, I believe, in Q2 last year. So there maybe still a little bit of bumpiness next quarter when you compare to the previous year. But then after that, it should be on an apples-to-apples basis until -- obviously, until we get the leasing done.
Okay. So is it fair to say that these should be largely addressed in a year's time, I guess, by early 2019?
Yes. They'll be finished by later this year. The deals are done. And it's a question of making it happen.
Okay. Sounds good. And then my last question for Floriana. The early -- sorry, the early renewal costs, I just wanted to confirm that, that was $135,000 for Q1?
Yes, it was.
Okay. Because the other -- I think the other number, the 440 something that was in addition to the higher interest expense combined with that as well, correct?
Yes. So we had the 1-month overlap of converts.
Right. Okay. So the early renewal fee itself was $135,000 for the quarter?
That's right. And then, Jenny, I think you had the question that we didn't answer on the bad debt expense. So that -- in terms of color on that, Michael, I'll start and if you want to chime in, but...
Sure.
That happened actually at the end of the quarter. So that bad debt expense relates to amounts outstanding prior to the CCAA. And our experience is generally that if you're getting anything, you're getting cents on the dollar for past stuff. They -- since the CCAA, they are obligated to pay and they are paying rent. And we have not heard anything at this point in terms of whether any leases will get disclaimed or reorganized in any fashion. So for now, they're still going to pay rent. They might -- at a later date, when the CCAA proceedings are finished, there may be some impact to our go-forward NOI, but at this point we don't know.
So is that to say that the -- but if it was already charged in Q1, is there another -- is there more impact in Q2 to follow or Q3?
There should be less impact.
Yes. It should be less, because that was for more than a month's rent, right? I mean that was a few months accumulated. So even if they bailed for the rest of the year, let's say, somehow or disclaim the leases for the rest of the year, the impact would probably be for the rest of the year -- probably wouldn't be much more than what we recorded for the bad debt expense, right?
Okay. It would just be the year-over-year comparison that you're referring to?
Yes, exactly. The only impact would be if we actually get a vacancy out of this. Right now, we don't have vacancy and right now they are obligated to pay rent.
We anticipate we're going to get 1 or 2 vacancies out of this and that -- there's 4 stores. It's with Wicker Emporium, which is a regional chain in Atlantic Canada. And we expect -- of the 4, we'll keep 2, maybe 3. So we may lose 1, we may lose 2. And I guess, we'll go step-by-step.
Is there any sense on how long this will take to play out, or not really?
Usually, these things can drag, but this is not a big, big business enterprise. So I would expect that it will play out over the next quarter.
Your next question comes from the line of Sumayya Hussain from CIBC.
Just on the pending sale of the Alberta assets. When do you expect that to close? And then would you look to sell the rest of the assets in that region as well?
Floriana, do you know closing date is in June, I believe?
Yes. I think, it's June.
It's June closing. We will then left with 2 Shoppers Drug Marts in Alberta, which we do not plan to sell.
Okay. And then the pricing that you've gotten so far, is that kind of in line with your expectations?
No. It goes way beyond their expectations.
In a positive way.
.In a positive way. Yes, I didn't expect it to be at that level at all. So what occurred here is that we did a lease renewal. So at that point in time, we always consider these assets to be absolutely nonstrategic for us. We are not active in that market. We do not plan to be active in that market in the near term. So if you can realize a good sale, take it, recycle the capital, put it to work. And I expect it may be a 6% cap rate, and then we'd have to make a decision. And obviously, we got some very aggressive bids; we got unconditional bids, all within that range between 5.33% and 5.4%, which I thought was very, very surprising. So maybe we're disconnected from the Alberta market, and maybe that's the reason why we should get out.
And I've got that we're closing June 30, Sumayya.
[Operator Instructions] Your next question comes from the line of Michael Smith with RBC Capital Markets.
Michael, you had mentioned in your opening remarks that we are in unusual times, and indeed, I would definitely agree. It doesn't look like it's going to change anytime soon, at least from what I could see anyway. May be you have a different view. What has that had on your -- what effect has that had on your strategy? Have you changed your strategy at all? Are you adjusting to it? Are there opportunities that may come from this or things that you want to avoid because of what's going on?
Well, I'd like to think that we are always adjusting our strategy. At the same time, remaining very focused on our retail, development and redevelopment. But how we redevelop or develop, that's always changing. It's very much based on retailer demand and opportunities. We are seeing a very, very large number of opportunities, and the challenge for us is just to make the numbers work and making sure that the deal is affordable. We are seeing a lot of opportunities. Whether we'll do them or not, that's a whole other question. But we're certainly spending a lot of time looking at stuff. We're probably seeing more opportunities today than a year or 2 ago just because of the strange times. And you do have people that are looking at their retails and saying, What I'm doing with this?" or you are seeing the passive style, the transformee, as they call them, sitting there, and that's -- those are great opportunities for us.
Yes. I mean -- like, I guess, in the past, you buy something, fix it up, so to speak, reposition it, make it into a very predictable cash flow property, put long-term debt and then you'd hold it and keep the high cash flow. And I'm just wondering, given there seems to be big demand for stable properties and there's lots of opportunities, are you sort of thinking about more selling stuff that maybe in the past you would've kept for cash flow?
Yes. Yes, absolutely. I mean, that's always a consideration today. Particularly, as you look at our unit price level, it's a price level that does not permit us to go out and raise any equity, if we have some interesting transactions. So we have to be extra creative and that means capital recycling. That means partnering with financial-style partners. Trying to lever off of that relationship and earn greater yields on our capital invested in a particular project. So we definitely -- you definitely have to look at that.
Mr. Zakuta, there are no further questions at this time.
In conclusion, we continue to offer a very different real estate investment opportunity. Plaza does not buy finished properties from third-party developers or from related parties at low cap rates as we are fully internalized and able to develop new retail properties using in-house resources. Plaza locks in consistent long-term returns by financing with long-term debt, generally matched to these lease maturities. We have consistently demonstrated our entrepreneurial abilities by adapting to changing market conditions in order to grow our business. Insiders hold an important ownership position and look forward to growing Plaza's distribution and creating value in the future. Thank you for participating in today's call.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.