Plaza Retail REIT

TSX:PLZ.UN

Earnings Call Transcript

[Operator]

Good morning. I'd like to welcome everyone to the Plaza Retail REIT's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] I'd like to advise everyone that this conference is being recorded.I will now turn the conference over to Mr. Michael Zakuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zakuta.

[Michael Aaron Zakuta, President, CEO & Trustee]

Thank you, operator. Good morning, and thank you for joining us on our Q2 2019 results conference call.We are 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. Please refer to Plaza's public filings for a discussion of these risk factors.We continue to be very positive about our prospects as we grow our business across our geography. As a very active developer, we at times find ourselves in what we call the development lull created by: one, our development program, whereby we invest but do not see any revenues until a project comes online; and two, our asset sales program, whereby we recycle capital as we sell noncore assets, lose NOI, invest in new developments and then gain back the NOI and more from new developments that become income-producing. We anticipate strong growth in Q4 and throughout 2020 as a number of projects start to contribute to our NOI.As we move through the middle of 2019 and reflect upon the state of our business, we are in excellent shape. We have strong growth in normalized FFO per unit in our forecast, higher occupancy, strong leasing spreads for our strips, our core business, more than enough available capital to pursue our developments, we have taken advantage of new project financing and existing property refinancing opportunities to lock in lower rates for long periods, and we have a robust pipeline.On today's call, we're going to try something a little different for us. We have included some before-and-after photos of various new redevelopment projects on our website. You can open the presentation by going to our website, I ask you if you want to follow, go to www.plaza.ca. Let me go through this slowly. Click on the Investor Relations section, then click on Financial Reports, and then scroll down to Presentations and click on Analyst Conference Call August 2019 Development Pictures. I'll give you a moment for those wishing to follow this photo narrative.Moving from East to West, we start in Halifax, Nova Scotia, where we have redeveloped the former Home Outfitters space into a new Giant Tiger and Canada Computers stores.We then proceed to New Minas, Nova Scotia. The before slide shows a photo of the former Future Shop. We took an early termination payment for the cancellation of the lease. The after photo shows the new Easyhome and Dollarama.We then cross over to Saint John, New Brunswick, where we replaced Cleve's Sports, that's the first photo, with a new Dollarama.Next, we see the before in Montmagny and after of a small transformation in Montmagny, Québec, where again we replaced a Vidéotron video store with a Bulk Barn, downsized a florist and brought in an audio clinic.The next slide shows the empty Sears in Chicoutimi, Québec that we acquired at the end of 2017. We then have a recent drone photo showing the new storefronts under construction. The property is 90% leased, intended to open in Q4 2019 and Q1 and Q2 2020. Next, we move to Sherbrooke, Québec, and you will see a before photo of an empty Réno-Dépôt store. The next slide shows the property in its present state with new Value Village and JYSK stores that are open and the SAIL Outdoor store under construction. We then move to the Montreal suburb of Saint-Léonard. The before photo shows a typical KFC. We demolished the old building and replaced it with a new A&W that opened last month. We then move to Brockville, Ontario, where you see an empty Sears store. We acquired this property in early 2018. The next slide shows a current photo of the former Sears building that has been leased to Planet Fitness, Dollarama, The Source, Easyhome, Bell and Treasure Hunt. All of the former Sears frontage is now leased. We then move to Scarborough, Ontario. This was a former key REIT asset that was in very poor condition. The next slide shows its present state with a shiny new Tim Hortons, a downsized and new KFC and renovated M&M and Pizza Hut outlets. I trust that these illustrations will help you to better understand our business. These very recent photos go a long way to telling the story of some of our redevelopment successes and give you a sense of how active we are day in, day out. We continue to see opportunities where others do not. An active developer such as Plaza has a true advantage as we are constantly interacting with retailers and adjusting to changes in retail real estate. We are very active in pursuing opportunities such as the redevelopment of challenged enclosed mall, recycling obsolete retail buildings, new developments following demolition of an existing building or buildings, and new development following land assemblies based on demands from growth-oriented retailers.In addition, we'll continue to be a very proactive landlord. We do not hesitate to initiate change in order to keep up or build value within our existing portfolio, whether it is making leasing and tenant changes or physical improvements to the properties. Our properties are typically smaller and very community-centric, attracting customers on a regular basis as they conduct their pre- and post-work routines.Plaza tenant lineup features value, specialty and necessity-based retailers who require a local physical presence. We are confident that our value-added business model is poised to take advantage of current retail trends and will create significant value for our unitholders.I will now turn the call over to Floriana Cipollone, Plaza's Chief Financial Officer.

[Floriana Cipollone;Chief Financial Officer]

Thanks, Michael. At a high level, Plaza's results for the quarter and year-to-date were impacted by 2 significant lease buy-out transactions included in the first quarter of this year and the resulting vacancies that they caused. The first was then to replace an empty mid-box with one that would drive more traffic to the center. The second was a full present value buyout of a store that we are confident in our ability to re-tenant.Excluding the impact of the lease buyouts and other similar items that are considered to be nonrecurring in nature, funds from operation per unit were up versus the prior year, almost 3% for the quarter and 0.4% for the year-to-date, and this is notwithstanding a decrease in net property operating income due to disposals of noncore properties. Net property operating income on a same-asset basis was also up compared to the prior year, excluding the impact of the lease buyouts, 1.3% for both the quarter and year-to-date.In March of this year, Plaza entered into an automatic securities repurchase plan in order to facilitate repurchases of units under our normal course issuer bid. To June 30, 2019, 348,000 units were repurchased, and we continue to repurchase units. We believe that this is a desirable use of funds and in the best interest of unitholders at the current trading price.We've sold approximately $17.5 million of noncore properties through the end of the second quarter at values above our IFRS values, generating approximately $8.9 million in cash. $11.1 million of the sales were former key REIT properties that had an underwritten value of $10.1 million, generating almost $0.01 in net asset value creation.And in terms of Plaza's IFRS values, we recorded another meaningful fair value gain on investment properties during the quarter due to a further decrease in capitalization rates in the quarter, largely stemming from higher values on a number of appraisals received on properties during the quarter.Total fair value gains for the quarter and year-to-date were $11.5 million and $18.1 million, respectively. Both the sales at higher values and the higher appraisals confirm that there is value within our existing portfolio that doesn't necessarily come out through internal valuation processing done for financial statement purposes.Finally, we continued our major refinancing program where we are rolling mortgages at historically low rates and generating funds for our business. To today's date, we have closed an approximately $116 million of financings at 100% on new developments as well as refinancings of existing mortgages, so longer terms, better amortizations with generally lower rates and generating approximately $25 million of cash for Plaza. These funds have been used to reduce our operating line of credit, thereby reducing operating line of credit interest in future quarters. We are currently working on approximately $64 million of financings at 100% on new developments and refinancings of existing mortgages. This should generate an additional approximately $7 million of cash for Plaza. We continue to review our mortgage portfolio for early refinancing opportunities that make sense in terms of cash flow savings to Plaza.Those are the key points relating to our financial results for the quarter and year-to-date. With that, we'll now proceed to open up the lines for any questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Kyle Stanley with Desjardins Capital.

[Kyle Stanley, Associate]

So I was just taking a look at your fee income earned on the co-owned properties, and it looks like it's been pretty elevated the past 2 quarters. I'm just wondering, could you talk a bit about that and maybe how you expect that income stream to trend into the back of the year?

[Floriana Cipollone;Chief Financial Officer]

So we've had -- obviously we've got a lot of developments on the go and a lot of refinancings as well. So the fee income is up from both financing fees that we charge on co-owned properties as well as development fees on a number of JV developments. So I would expect that it's going to continue to be elevated for the back half of this year and probably the first half of 2020 just because we continue to have more development and leasing fees being charged.

[Michael Aaron Zakuta, President, CEO & Trustee]

It really affects our level of activity and that a lot of this activity is done in a joint venture environment, so therefore, we are earning fee income.

[Kyle Stanley, Associate]

Okay. Okay, that's helpful. I guess my second question, so it looks like you're earning pretty healthy leasing spreads on renewal. Just wondering if you could speak about the current leasing environment in your markets and maybe how that's changed over the past 12 months.

[Michael Aaron Zakuta, President, CEO & Trustee]

I don't know if it's changed. The real basics -- the real basic real estate is going well. And I think I mentioned it last call that for some reason, a bunch of our chronic vacancy is being leased. So for a variety of reasons, I can't always explain. Space is moving. If you're in the fashion and mall, I don't think that's the same reality. But for the basic strip shopping center, there is demand for space, and it's coming from a bunch of different areas. It's coming from the value guys, the pet categories, the QSR, the fitness, the specialty guys. There is activity. Despite all the negative headlines about retail, there's a surprising amount of activity.

[Kyle Stanley, Associate]

Okay. Great. And I guess one more from me, and it's kind of along those lines. So just having seeing your before and after pictures that you highlighted earlier, I'm wondering of many of the new tenants in your after pictures, are they new to market? Or are they just typically moving from an existing space into newer, better space that you're providing?

[Michael Aaron Zakuta, President, CEO & Trustee]

I'd say they're mostly new to market. That will be -- it's 2/3 to 3/4 new to market and 1/4 to, say, 1/3 upgrading.

[Operator]

[Operator Instructions] Sumayya Hussain with CIBC.

[Sumayya Hussain, Associate]

Michael, on your commentary, you noted stronger NOI growth coming in Q4 and through 2020. So just from an organic growth point of view, should that be stronger than what you're seeing in 2019? Or do you see any offsets to that, bankruptcies, strategic vacancies, that could sort of hamper that NOI growth expectation?

[Michael Aaron Zakuta, President, CEO & Trustee]

No. I think there's real growth in the tail end of 2019 and obviously in 2020. And you can see it through the pictures because you see a lot of tenants that will be starting to pay rent in the end of the year or into 2020 as their stores open. So I don't think that there's going to be real impediments to that growth and, I guess, unless there's some bankruptcy that we don't foresee. But we think it's baked in into the system right now.

[Sumayya Hussain, Associate]

Okay. And I just sort of have a bit of a nitpicky question on the G&A. It looks like it was a little bit higher on some nonrecurring fees, but I think Q2 tends to be a little higher. I guess, Floriana, can you just go about why it tends to spike up a little bit in Q2?

[Floriana Cipollone;Chief Financial Officer]

Look, Q2 is -- we do our payroll, bonuses and pay increases on a different cycle than probably most people do. Most people do it calendar year, but we pay our bonuses and do our salary increases in Q2. So that's typically why Q2 spikes. But obviously, we had some other sort of nonrecurring fees happening this quarter as well.

[Operator]

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

[Michael Aaron Zakuta, President, CEO & Trustee]

Thank you. In conclusion, we continue to offer a very different real estate investment opportunity with our focus on very accretive developments and redevelopments. Plaza does not buy finished products 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 logs in consistent long-term returns by financing with long-term debt generally matched to 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 creating value for unitholders in the future.Thank you for participating in today's call.

[Operator]

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.