Plaza Retail REIT

TSX:PLZ.UN

Earnings Call Transcript

[Operator]

Good morning. I would like to welcome everyone to the Plaza Retail REIT Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I would 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. Thank you for joining us on our Q2 results conference call. We are legally obliged to tell you that today's discussions include 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. As we've now completed the most challenging quarter in our history, we're definitely feeling positive about our business. Collection levels have gone through 90% in July. We recently received the bulk of the CECRA funds owing to us. Over 98% of our stores are open and, in general, we have more tenants providing positive feedback regarding their businesses versus negative feedback. The soft areas remain in fashion, sit-down restaurants, cinemas and fitness centers. Our essential needs retailers continued to perform very well. Our fast food, pet shops, sports stores, hardware, value stores, hair salons and others have adapted well to the new reality facing retailers. Jim will take you through the collection numbers in his presentation. We are clearly facing retail headwinds as evidenced by our unit price. Our sector is oversold as retail REITs are undervalued. I have 2 comments regarding retail headwinds. One, we will continue to see an oversupply of retail space. This will create real opportunities for Plaza to rightsize these challenged assets and turn them into sustainable retail properties. Don't forget that we have been rightsizing retail properties for some time, whether it's a vacant Sears, Zellers, an enclosed mall with significant vacancies or an overbuilt strip center. Secondly, the size of the retail property market will likely shrink. Plaza is positioned to increase its relative market share at the expense of the passive property investor. We believe that Plaza's many years of experience in redeveloping challenged retail properties and its strong leasing and development capabilities will allow us to effectively navigate against these retail headwinds. In the midst of the pandemic, we're able to execute on 2 interesting projects. The first is the upcoming purchase of a grocery-anchored strip located in secondary market in Ontario, which presents a significant redevelopment opportunity. Our capital partner has agreed to fund the majority of our portion of the equity requirement during the redevelopment period. The second is and Atlantic Superstore anchored development, in a fast-growing suburb of Halifax, Nova Scotia. Construction on the grocery-anchored store has begun and leasing activity for the remaining space has been positive. As a result of the pandemic, we've also been able to take back space from unproductive retailers that will be recycled to more productive and successful operators. We did 172,000 square feet of renewals and 78,000 square feet of new leasing in the second quarter. We did 153,000 and 46,000 in Q1, as a comparison. Let's look to the top 30, as this provides good color -- our top 30 tenants, as this provides good color regarding security of our future revenues. We have included a schedule in the presentation section of our website. Our top 13 of the 30 are very solid and are performing well on all accounts. We have one fashion tenant, Reitmans, in the 14th position, representing 1.3% of our rents. Other soft spots are GoodLife, MTY, Recipe, Cineplex and Movati. We have now concluded COVID deals with these tenants and anticipate that they will make it through this crisis. Our core portfolio of pharmacies, grocery stores, dollar stores and other central needs tenants continues to deliver as advertised. We see our value retailers as being in a position to prosper in our open-air retail strips during difficult economic times. In many cases, we see our open-air property network as an important part of any retailer strategy to sell products through multiple channels. Our strategy being diversified across a wide geography with open-area properties that often dominate within the community will allow us to continue to grow. We have included some recent photos showing various projects that are underway, along with our top 30 list and our collection numbers on our website. We continue to build and offer a portfolio of defensive style assets anchored by essential-needs and value-oriented retailers. 93% of our revenue is generated from open-air centers with national tenants representing 91% of our revenue. As we look forward, we remain confident in our future. Our portfolio, our business plan have remained relevant, and we believe that we have a solid foundation from which to build as Canada emerges from this pandemic. I will now turn the call over to Jim Drake, Plaza's CFO. Jim?

[Jim Drake, Chief Financial Officer]

Thank you, Michael. Although this was obviously a challenging quarter, as Michael mentioned, we are positive about the prospects for our business going forward. Some of the reasons for this outlook become evident when we look through the noise in Q2. Excluding the impact of lease buyouts, write-offs under the CECRA program and bad debt expense, year-to-date NOI was up 7% over last year, and same-asset NOI was up 2%. Also, excluding the impact of these same items, FFO and AFFO per unit were up 13% and 15%, respectively. We leased approximately 450,000 square feet year-to-date, with renewal spreads of 3% for open-air centers. Committed occupancy remained strong at 96.2%. Under our development program, we completed the redevelopment of a retail strip plaza in Brampton, Ontario during the quarter, and year-to-date transferred $18 million of fair value to income-producing properties. We also commenced construction on a few expansions at existing properties, and as Michael mentioned, started construction on a new grocery-anchored development in Halifax and went firm on the acquisition of a grocery-anchored strip in Ontario. These transactions are a testament to our ability to adapt and both source and fund deals. On asset sales, we sold a QSR during the quarter and anticipate closing on the sale of a 50% interest in 5 Shoppers Drug Mart properties in August, which will generate $4.5 million of cash for Plaza. For fair value, we recorded a $28.6 million loss on investment properties as a result of increased cap rates and more conservative assumptions for underwritten NOI and releasing costs. Our liquidity at June 30 included $7.5 million of cash, $3 million available on our operating line and $42 million of unused development and construction financing facilities. We also have unencumbered assets with a value of approximately $26 million. Subsequent to quarter end, we added $4 million of cash comprised of $3 million of funds from the renewal of our Series X mortgage bonds and $1 million of collections from the federal government under the CECRA program. For long-term debt, as of June 30, we had $55 million of mortgage maturities remaining in 2020. Subsequent to quarter end, we extended $6 million of that into early 2021. For the remaining mortgage maturities, most of which relate to grocery or pharmacy anchored properties, the overall loan-to-value is below 60% and we are confident we can renew or refinance these mortgages at lower interest rates. We also signed a term sheet for long-term financing on a recently completed redevelopment in Quebec, and anticipate closing that mortgage later this summer. Now an update on rent collections. For Q2, we collected 82% of gross rent, including the federal government contribution under the CECRA program. Collection rates are increasing as well, starting at 80% in April and May, rising to 86% in June and 92% in July. We have also signed deferral agreements with certain tenants totaling 7% of Q2 rent, with repayment of the deferred rent over definitive time lines generally commencing in Q3 of this year. We continue to work actively with our tenants to determine acceptable payment solutions for any remaining unpaid rent. To mitigate the short-term cash flow impacts from uncollected rent, Plaza is continuing with a proactive cost management program to reduce general and admin expenses, both in the short and long term, reduce property operating costs and defer elective capital expenditures. Those are the key points relating to our results for the quarter and year-to-date. We will now proceed to open the lines for any questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Kyle Stanley from Desjardins.

[Kyle Stanley, Associate]

So I was just wondering if you could talk a little bit about the Shoppers dispositions that are expected to be completed this month. I'm just wondering, is this -- were you looking at it as a way to generate a bit of liquidity for the REIT? And if so, do you see any other similar opportunities down the road?

[Michael Aaron Zakuta, President, CEO & Trustee]

Yes. I mean, this was clearly a reaction to COVID and the deferred rents that we have to deal with. So we put a plan in place earlier in the year, and I guess, in the middle of COVID, where we organized a syndication to limited -- we call it a limited partnership style investment, about 20, 25 investors. And that will create a liquidity. We still own 50% and manage the asset. That is something you might see next year as a means of raising capital because, obviously, at current unit price, we're not issuing equity.

[Kyle Stanley, Associate]

Right. No, that makes sense. That's what I thought. Okay. Then just looking at the IFRS value of the portfolio for a minute. You mentioned an increase in cap rates was the primary driver there. I'm just wondering, is that driven by a few select assets? Or is that just kind of a broad increase across the portfolio?

[Jim Drake, Chief Financial Officer]

It was generally a broad increase across the portfolio, more geared towards enclosed malls for sure, but we'd obtained a cap rate matrix from a third-party appraiser. And other than freestanding assets like a free-standing Shoppers Drug Mart, the increase was generally widespread.

[Kyle Stanley, Associate]

Okay. And I'm not sure if you have this offhand. I'm just wondering, do you have the gross rental revenue figure for the quarter? I know that some of the other REITs have seen their -- sometimes there are some other additions in there and then just it helps when trying to calculate the -- look at your rent collection status.

[Jim Drake, Chief Financial Officer]

Yes, absolutely. It was about $26 million gross rent for the quarter.

[Kyle Stanley, Associate]

Okay. Great. And then lastly, thanks for the slide in the deck on your rent collection. It's very informative. I'm just wondering, like, looking at the rent abated, it's a very small number. And then obviously, the rent deferrals, thus far, in July, have come off significantly. I'm just wondering, in kind of your agreements with tenants, have you -- has Plaza been able to enter any kind of favorable new leases? Or make any changes to the existing leases as a result of extending that help?

[Michael Aaron Zakuta, President, CEO & Trustee]

Yes. In certain circumstances, we obviously were able to make certain adjustments and changes that were favorable to the landlord in exchange for our support. That's pretty standard practice. I can't say that we did a ton of it but clearly, we're not giving away rent. We have done abatements where we felt necessary. We've obviously focused on deferrals. And we were part of the CECRA from the get-go. We felt it was the right thing to do, so that there is a cost there. But you're not treating with tenants -- with respect to CECRA.

[Operator]

[Operator Instructions] Mr. Zakuta, I show there are no further questions at this time.

[Michael Aaron Zakuta, President, CEO & Trustee]

Well, thank you, operator. Thank you, everyone, for participating.

[Operator]

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