Plaza Retail REIT

TSX:PLZ.UN

Earnings Call Transcript

[Operator]

Good morning. I would like to welcome everyone to the Plaza Retail REIT First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would like to advise everyone that this call is being recorded. I will now turn the conference over to Kim Strange, Plaza's General Counsel and Secretary. Please go ahead, Mr. Strange.

[Kimberly Strange, executive]

Thank you. Good morning, everyone, and thank you for joining us on our Q1 2024 results conference call.

Before we begin, we are obliged to advise you that in talking about our financial and operating performance and in responding to questions today, we may make forward-looking statements, including statements concerning Plaza's objectives and strategies to achieve them, as well as statements with respect to our plans, estimates and intentions, or concerning anticipated future events, results, circumstances, or performance that are not historical facts. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements.

Additional information on the risks that could impact our actual results and the expectations and assumptions we applied in making these forward-looking statements can be found in Plaza's most recent annual information form for the year ended December 31, 2023, and management's discussion and analysis for the first quarter ended March 31, 2024, which are available on our website at www.plaza.ca and on SEDAR Plus at www.sedarplus.ca.

We will also refer to non-GAAP financial measures, widely used in the Canadian real estate industry, including FFO, AFFO, NOI and same asset NOI. Plaza believes these financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the trust. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similar titled measures reported by other real estate investment trusts or entities. They should be considered as supplemental in nature and not as a substitute for related financial information prepared in accordance with IFRS. For definitions of these financial measures and where to find reconciliations thereof, please refer to Part 7 of our MD&A for the first quarter ended March 31, 2024, under the heading Explanation of Non-GAAP Measures.

I will now turn the call over to Michael Zakuta, Plaza's President and CEO. Michael?

[Michael Zakuta, executive]

Thank you, Kim. Good morning. We appreciate you joining today as we review financial performance, some of the key metrics and achievements for the first quarter of 2024.

As a development-focused REIT, we strive to create value through new retail ground developments, redevelopments, repositioning of assets through effective management and leasing initiatives. The first quarter of 2024 was a showcase of all of the above.

In addition, we successfully began our 2024 capital recycling program. We are very pleased with the demand for the properties we are looking to sell. We continue to achieve record leasing spread, and our portfolio of roughly 9 million square feet has very little vacancy. We continue to respond to needs of customers, which include expanding, rightsizing and relocating tenants in order to maximize the value of our properties.

The flexibility and attention to detail we provide has and will always be a vital part of our success. The real estate landscape is still affected by certain geopolitical crises, inflationary pressures and rapid interest rate expansion. We have not yet seen the compression in industries that will eventually make REITs a more attractive investment. Fundamentals remain strong in the space in which we operate. Our portfolio is resilient and comprised of high-quality essential needs retailers who target nondiscretionary spending.

I will now turn the call over to Jason, who will talk about our future prospects.

[Jason Parravano, executive]

Thank you, Michael. During the quarter, we completed 193,000 square feet of development projects and significantly advanced a number of other developments through pre-leasing and preconstruction phases. Tenant demand is robust, and the geographic positioning of our asset mix is an advantage.

The markets in which we operate have seen significant population growth, and incremental demand from consumers translates to better performance for our tenants in markets where retail supply is limited. This has a direct impact on rental rates.

One thing we can all agree on is that we see strong demographic trends, whether through new job growth or population growth, this benefits retailers overall. As we prepare for the construction season, pre-leasing activity remains strong as we finalize our tenant mix for certain projects. Pre-lease space in active properties under development was at 99.5%.

Our capital recycling program for 2024 has commenced with the sale of 2 noncore QSR properties. We're currently working on ways through various bids and due diligent processes with many qualified buyers and have completed certain dispositions since the end of the first quarter. Interest and bids remain compelling and in excess of our IFRS values. We look forward to completing the rest of the program as the year progresses.

As we mentioned in the past, the overall goal and effect of our capital recycling program is to increase the average size of our properties, to reduce the average age of our assets and improve the overall quality of the portfolio.

During the quarter, we also renewed 206,000 square feet at record high leasing spreads. Fundamentals discussed earlier have allowed us to experience some of the highest leasing spreads in our history. Leasing costs for the quarter totaled approximately $1.6 million and helped better position our assets for the long term. We only began to benefit from enhanced overall property NOI upon the reopening of these spaces.

For the quarter, our same asset NOI was 3.8%, which is a direct result of certain asset repositioning and strong leasing spreads. Nondiscretionary retailers are aggressive in seeking new opportunities, whether opening at new locations or expanding into bigger spaces when available. We are also experiencing a [indiscernible] contrast between discount or value retailers versus retailers with traditional pricing models. There continues to be a lot of demand from QSRs, who will offer the consumer a good value proposition in contrast to any mid-priced sit-down restaurant offering.

Plaza's focus has always been retail. We know it very well. We remain focused on being a best-in-class developer and owner of retail properties. We are the only publicly traded REIT offering investors access to pure play essential needs, value and convenience retail developments.

Finally, I'd like to highlight that we published our second annual ESG report this week. Some of the highlights were as follows: Plaza reduced energy intensity by 14% in our operated spaces across the portfolio. We completed 23 LED retrofits of exterior lighting at our properties, saving an estimated 500,000 kilowatt hours electricity. We have met and discussed with tenants representing 40% of our [ delayed ], their initiatives, their ESG initiatives and how we can collaborate on this front going forward at our properties.

We are committed to Board gender diversity and currently exceed our target of 30%. Our goal is to create high-quality, relevant and sustainable retail properties. We believe that success and sustainability go hand in hand. And by managing environmental impacts and improving efficiency, we can generate more desirable properties, which are able to serve all of our stakeholders well into the future.

With that, I'll now turn over the call to Jim Drake, our CFO.

[Jim Drake, executive]

Thank you, Jason. Good morning, everyone. I will expand on a few of Michael and Jason's comments and highlight our results.

Total NOI was up more than 7% over last year, which includes impacts from recently completed developments as well as that same asset NOI growth Jason mentioned of 3.8%. This is one of our strongest performances for same asset NOI.

On a dollar basis, FFO was up almost 6% over last year, with per unit performance impacted by our equity raise and issue of 8.5 million units in March of 2023. AFFO was impacted by leasing costs as a result of increased leasing related to growing revenue going forward. AFFO was also impacted by maintenance capital expenditures, including replacing a portion of our roof and roof structure at one of our properties during the quarter.

On the leasing front, overall commuted occupancy was consistent with last quarter, now at 97.1%, which remains at the high end of our recent history. Lease renewal spreads continued to improve at 8% for the first year of the renewal term or 9.9% using the average rate over the renewal term. This is our strongest performance for renewal spreads over the last few years.

On the balance sheet, our debt to assets ratio is consistent with last quarter at 51% excluding land leases. We have [ $32 ] million of mortgages rolling for the remainder of 2024 with a weighted average rate of 4.38% and an overall loan-to-value of 46%. Although government of Canada bond yields remain a bit volatile, we do anticipate they will continue to trend down.

The market for debt for our assets and an attractive borrower like Plaza is very healthy, and we continue to see strong interest in our offerings. This is evidenced by the reduced spreads we are seeing from lenders with all-in rates for our fixed rate mortgages currently in the 5.4% to 5.9% range. Under our capital recycling program, sales prices, including properties held for sale at quarter end, exceed IFRS values by 10% at a weighted average cap rate of 5.8%.

For overall valuations, we took a $1.3 million write-down during the quarter, and our weighted average cap rate is now 6.84%. And the current environment, we believe, is very realistic, if not conservative, given the quality of our portfolio.

Those are the key points relating to the quarter. We will now open the lines for any questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Rothschild from Canaccord.

[Mark Rothschild, analyst]

In regards to the development projects that you've completed and maybe what you're looking at now, can you just give a little more color on the yields that you're getting and you're seeing? And how have those shifted with greater construction cost and just costs in general?

[Jason Parravano, executive]

Mark, it's Jason here. So with respect to our development projects, our target yields on our development projects are obviously higher than the average cap rate of the portfolio. So always trying to target the open air strip developments north of an 8% yield.

Obviously, some of the projects that have come online over the last couple of years, many of those projects would have started, call it, pre-COVID. That said, those projects would have been impacted by certain price inflations, which obviously reduced the overall construction yield.

So I would say that the projects that would have come online at the end of 2023 would have been impacted and would have had lower yields than what our target is, but the projects that have recently come online or that are going to become online in the future are closer to what our traditional targets would be.

[Mark Rothschild, analyst]

Okay. Great. And then just on leasing spreads, we look at what you've been able to do lately. Is that a good estimate of what we should expect, not necessarily exactly, but in the range of we should expect to see in the near term going forward? Clearly, when general have gone up.

[Jason Parravano, executive]

Yes. So for the rest of the year, we do have some renewals that we are working on, a handful of them at market rates. I expect a nice chunk of them to be at the higher end of the spreads like we've experienced. But it's a balance, right? There's a mix.

So we have approximately 300,000 some-odd square feet remaining for the rest of the year. Much of them do have contract renewals baked into them. But where we can take advantage of the higher lease spreads, obviously, that is the goal.

[Operator]

[Operator Instructions] Your next question comes from the line of Sumayya Syed from CIBC.

[Sumayya Hussain, analyst]

Just firstly on the AFFO, noting that the lasing cost can be lumpy. Would it be fair to say that the majority of the item in that bucket would be where you would seem to be revenue enhancing? And as a follow-on, where do you expect the payout ratio to trend over the course of the year?

[Jason Parravano, executive]

It's Jason here again. So our AFFO for the quarter was largely impacted by a one-off roof and structural repair. So typically, our CapEx for the year runs around $2 million to $2.5 million mark. So taking into consideration we had a one-off charge, capital spend of approximately -- in the range of $700,000 to $800,000 during the quarter. Again, that's a one-off charge. But we expect our CapEx to range or to be in the range that has been historically with that exception.

[Sumayya Hussain, analyst]

Okay. And on the same-property NOI for the quarter, it's pretty high. And I think there was a comment that there was some benefit from repositioning activities. Excluding that, would the same property number have been more in line with what you've delivered historically, like in the 1% to 2% range?

[Jason Parravano, executive]

No. I think our same-property NOI is benefiting again from our higher leasing spreads. Yes, the quarter was significantly high as we have a boost from certain repositioning of a couple of QSR assets, which didn't have any revenue from the prior year. I think it will likely trend a little bit lower as the year progresses. But again, we are benefiting it from higher leasing spreads on our properties.

[Operator]

Mr. Zakuta, there are no more further questions at this time.

[Michael Zakuta, executive]

We wish to thank all the participants for joining us today.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.