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 Fourth Quarter 2017 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.
Thank you, operator. Good morning. Thank you for joining us on our Q4 2017 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. Once again, we are pleased to report that we have successfully executed on our business plan, growing our company, delivered solid results for the year ended December 31, 2017. Our Board of Trustees approved our 15th consecutive annual distribution increase for 2018. Our initial distribution of $0.08 per unit in 2003 has grown to $0.28 per unit in 2018. Plaza's unit price has been significantly impacted by investors exiting North American retail REITs. E-commerce disruption continues to influence retailer strategies and is leading unprepared landlords exposed to increasing vacancy. The Sears Canada bankruptcy as well as well-publicized challenges for U.S.-based department stores has added additional selling pressure on retails REITs. We believe that there exists a disconnect in the market's evaluation of retail REITs. Operators, such as Plaza, who possess strong leasing and development infrastructures, can take advantage of the present environment and seize opportunities -- seize interesting growth opportunities. For example, we're able to quickly take advantage of the Sears store closures in Canada. We acquired a 50% interest in a Sears store in Saguenay, Québec in December 2017. This store features an excellent location in the heart of the market's main commercial area and will be redeveloped into 10 units leased to national retailers. In January 2018, we acquired the 1000 Islands Mall in Brockville, Ontario. The mall's main anchor was a Sears store, and we are in the process of simplifying the enclosed mall into a strip center and redeveloping the former Sears store into several retail units. In both cases, these redevelopments will dramatically transform the shopping experience of these properties and create improved and more sustainable cash flows from them. Furthermore, in 2017, we successfully negotiated the early termination of 2 leases with mid-box retailers that were closing unproductive stores. This provided us with the opportunity to enter into new leases with retailers that are more relevant in today's retail environment, and we expect to receiving rent from both these spaces in 2018, long before the early termination payments that we receive effectively run out. We continue to shape the tenant mix in our portfolio with an emphasis on leasing to relevant and sustainable retailers who are much less prone to e-commerce disruption. We are currently observing other REITs working to exit all but the big six markets in Canada. This trend should favor Plaza as more opportunities will be available to us. We have dramatically grown our cash flow and distributions over the years by effectively navigating to the opportunities available outside of the big six Canadian markets. We are focused on markets that have grown to interprovincial migration and immigration, and have been highly successful markets for value, specialty and necessity-based retailers. At the end of January, I attended the ICSC Whistler Conference with our leasing team. This is an important event for development-oriented businesses such as Plaza. Our leasing team met 55 different retailers or their representatives during the 2-day event. Majority of retailers present were looking to open stores or improve their location. Most of the retailers present would be described as value, specialty or necessity-based retailers. The event was successful from our perspective as the retailers that we met were there to do deals. Our leasing team left the event with positive outlook for leasing in our world of value, specialty and necessity based retail. Plaza's development and redevelopment pipeline remains strong. We see -- foresee continued growth and opportunity for both redevelopments and new development projects. We continue to pursue a number of joint venture initiatives with various types of partners such as residential land developers with excess retail lands, institutions and property owners seeking a strong and capable development partner such as Plaza. Plaza will continue to recycle capital or to fund its growth, and we'll pursue structure deals with private and institutional investors. On a somewhat different note, we always talk about how the retail world is evolving. If you look at the chart on Page 5 of our MD&A, you'll notice in the construction expansion section that we have 3 sites in New Brunswick of 3,000 square feet each under construction in Sussex, Miramichi and St. John. These pad buildings are leased on a long-term basis to the New Brunswick Liquor Corporation for cannabis retail stores. New Brunswick has been the most organized and efficient province with respect to developing their cannabis retail strategy. We won 3 bids for freestanding pad developments on excess parking areas of these existing projects. This addition will earn us development-style returns. It's important to note that we will not pursue cannabis retail stores on sites where we do not have a level of comfort with the cannabis use versus our tenant mix. We obviously do not have any experience with the impact of government-run cannabis stores on neighboring retail stores. We will keep you posted. This should be interesting. Plaza's business model has always focused on developing or redeveloping new space for value, specialty and necessity-based retailers. Over the years, we have built a stable and geographically diversified portfolio to support our monthly distributions to unit holders. In today's investment environment, we offer investors a compelling yield combined with future growth. Going forward, we'll continue to pursue our goal of building value for our unit holders and generating per unit growth and ultimately, increased distributions. And we'll continue to differentiate ourselves from other REITs. This growth may not be linear at all times and the development cycle may be longer in today's environment, but we believe it will ultimately produce increasing distributions year after year. Current market conditions represent an interesting buying opportunity for REIT investors. 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 and year.
Thank you, Michael. Excluding the impact of lease buyouts, funds from operations or FFO per unit was down 1.2% and up 3.5% for the quarter and year-to-date, respectively, while adjusted funds from operations or AFFO per unit was up 3.1% and 7% for the quarter and year-to-date, respectively. FFO and AFFO were mainly impacted by growth in developments and redevelopments as well as a decrease in financing costs from the redemption of both the Series B 8% converts in 2016 and the Series C 7% converts in 2017. Total net operating income was down 1.1% and up 2.7% for the quarter and year-to-date, respectively. Total net operating income was impacted by growth from developments and redevelopments as well as the 2 significant lease buyouts as Michael mentioned, both the revenues recorded on those lease buyouts as well as the vacancy caused by them. Same asset net operating income was down 1.4% and up 0.1% for the quarter and year-to-date, respectively, mainly impacted by the vacancies caused by the 2 significant lease buyout transactions concluded in 2017 as well as rent steps in the portfolio. Subsequent to year-end, 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 in 2018. 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 lease term of approximately 7 years. For the remaining 19 sites, we are planning the immediate redevelopment of 7 of the sites, the immediate sale of 3 sites, all of which are currently firm and awaiting closing, and the future redevelopment of 9 sites. As well, subsequent to year-end, we partnered with the Canadian pension fund to increase our interest in returns in 2 Moncton area plazas. Our interest was increased from 10% to 50%, with the pension fund buying the other 50% on a co-ownership basis. Both properties were previously co-owned by us through 2 retail syndications. The incremental growth investment was approximately $17 million, and the incremental net investment was approximately $5.6 million. This transaction reflects our strategy to capitalize on opportunities within the existing portfolio and enter into value-enhancing transactions. Our payout ratio, excluding the impact of lease buyouts, was 79.7% on FFO and 86.1% on AFFO for the quarter compared to 75.8% and 85.4%, respectively, in the prior year. For the year-to-date, our payout ratio was either consistent with or improved over the prior year at 79.2% on FFO and 85.5% on AFFO compared to 79.2% and 88.4%, respectively, in the prior year. Our leverage ratio ended the year at 48.4% of assets, excluding converts, and 52.2%, including converts. Subsequent to year-end, Plaza completed a bought deal public offering of $47,250,000 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 are being used to early redeem our Series B 5.75% convertible debentures. Notice of that redemption went out on February 21, with a redemption date of March 27. The remaining net proceeds are being used to repay amounts outstanding on our operating line and therefore, ultimately, to fund future developments and redevelopments. Those are the key points relating to our financial results for 2017. With that, we'll now proceed to open up the line for any questions.
[Operator Instructions] Your first question comes from Sumayya Hussain from CIBC.
Can you tell us the -- what the cap rate was on the interest you guys sold in those 8 properties?
The cap rate was in the mid-7s, I believe.
Okay. And just in terms of the environment out there, have you guys seen any impact in the leasing spreads or tenant demand in your portfolio from Sears departure?
The impact that we see, obviously for us as you know, we have -- we see some opportunities, which we think are very interesting, and that those are going to be very profitable transactions for us. What we're seeing is that certain tenants that would be doing deals on new sites are focused on the Sears opportunities and have to do that, so it takes some time for that to shake up. So it does slow leasing velocity. On a couple of sites, we may be impacted because the tenant will look at taking a Sears box at the lower end as opposed to a new development opportunity from us. So it does have an impact. There are opportunities for us, but there also will be a slowdown of certain types of tenants taking advantage of Sears box opportunities as opposed to new offerings from developers like ourselves.
Okay, perfect. And then just for you guys moving forward, any more potential Sears acquisitions in the pipeline?
We're looking at additional ones. Nothing to report nor do we want to speculate at this point in time.
Your next question comes from Mike Markidis with DesJardins.
Just on a couple of odds and sods, purely unrelated. Michael, I think in the past, unless I missed that you didn't necessarily give us the details on the redevelopment you have in Mississauga, first of all, just curious if you'd tell us what you're doing on Century Avenue.
We're still -- we're almost at a position to demolish the building. We're waiting municipal approval. So we've been through the municipal planning process. And as soon as we get that, I guess we'll launch and announce. And I believe our retailer has not disclosed that they're going there, so therefore, I'm not going to disclose that.
Okay, but it's a complete re-purpose of an older...
Yes, it's a teardown of the warehouse office facility that's there. We build the parking lot, retailer comes in, tenant comes in and builds their building.
Okay, so it's a land lease situation?
It's like a partial land lease, and that we are -- we do -- or are doing some work.
Okay, got you. Okay. And is it a traditional retail format? Or is it just something that's...
No.
No, okay. All right. So we'll stay tuned for that. I think in the past, you've given a sense of Shoppers is obviously not growing their footprint anywhere, for that matter, and just spilling out in your markets. But then maybe post the -- on the back of the acquisition from Loblaw, they've certainly adapted their in-store offering somewhat. Could you maybe comment on that and give us your sense on whether or not you're seeing changes within the inside the stores and the shoppers that you have, and whether or not that gives you confidence that down the road, they're committed to these sites longer term?
I think we are seeing some modifications within the store. There are a number of tests that are going on within their portfolio to offer more food. And we're very confident that our leases will roll because they're first-class locations, and I don't think that they're going to leave them. I think you're going to see, obviously, an adjustment in the offering within the store. And we're seeing it. Will we see more of it? Yes, I would expect to see more adjustments going forward. Has they been major to date? No.
No, okay. And then last one for me before I turn it back. I think a very good outcome on the KFC extensions and renewals that you're able to negotiate. And you gave us some good color. I was hoping you could narrow down a little bit, just trying to think about in terms of the more shorter-term NOI impact. So if 90% -- or sorry, if 90% was the 90 plus of sites. So if the amount of leases that are renewing -- Floriana, I'm just trying to get a sense of what the short-term NOI impact would be. Obviously, an uptick of 5% on the renewals, which is what the lost revenue would be from the ones that aren't getting renewed and that you're going to redevelop and potentially sell.
That's a good question, and I'll probably not be able to do that quickly over the phone. I'll probably give you a call on that after the fact. It's definitely not material, I can say that. You're talking about small boxes. So if you're talking about 19 sites at 1,500 to max 2,000 square feet each, it's -- we're not talking about a lot of lost NOI.
So Mike, some of those sites are being sold and closing shortly. And then when there is a redevelopment, so there is the downtime. It can be 5 months, 6 months, 7 months of downtime before the new revenue stream starts. The new revenue stream is typically much stronger than the old one. The exact -- we haven't measured it exactly.
Okay. No, it's just more of from a forecasting and modeling perspective. Unfortunately, we got to try and get that right sometimes.
Okay. And actually, before the next question comes on line, I just wanted to clarify Sumayya's question from previously. The Atlantic syndication was actually low 7% cap rate, and it was basically tertiary markets in Atlantic, Canada.
Your next question comes from Troy MacLean with BMO Capital Markets.
Just on the asset sales. Do you expect 2018 to be a bigger year for recycling capital than in the last couple of years?
I don't think so. I mean, we just completed a bought deal of convertible debentures, so I don't see it as any bigger year than previous years, but we definitely will engage in some capital recycling.
And when you look at assets to sell, are you trying to, longer term, exit some of the tertiary markets? I know that was primarily what you sold in December to get in kind of the more like larger Atlantic Canadian market. Is that -- I'm just trying to think about where, in terms of geography, where you guys want to go in the next couple of years.
I don't think that we're trying to exit from Atlantic tertiary markets. If we have the right tenant mix and the right lease deal and financing in place, we're very happy to do business and we make some -- much higher yields in those markets. Obviously, the focus is in the strongest Atlantic Canadian markets, and normally, that's where retailer demand is. So we've been careful to avoid some of the really, really weak tertiary Atlantic Canadian markets, and we've done that. We've had opportunities, and we passed on them. So we're focused on -- there are some tertiary Atlantic Canadian markets that are going to be strong and are going to work well and tenants make a lot of money and therefore, prepared to pay us rent. So clearly, our focus still is in the main markets within Atlantic Canada.
Your next question comes from Michael Smith with RBC Capital Markets.
Michael, I'm just wondering, with a number of other REITS and investors exiting the big six -- or not exiting, but focusing on the big six and sort of exiting the smaller markets, are you seeing any cap rate changes?
Ask that question 6 or 9 months, I guess we'll -- we're going to see. You got to -- you have to believe that cap rates are going to move upwards in some of those markets, though I'm hearing that deals are being transacted in smaller Ontario markets at aggressive pricing, therefore low cap rates. So it's a tough one to call. Will you look at it on a deal specific basis? And can we make money? And clearly, we're not looking for finished product, as you know. We're looking for value-added opportunities that some of the bigger guys are not interested in, particularly safety markets outside of the big six. And so those opportunities are there, and we're obviously working on trying to take advantage of them.
And so like -- let's call it a little bit less demand for the investment product, we've got rising interest rates. Are you adjusting your development yield requirements?
Again, it's very project-specific. Obviously, yes, but at the same time, we're doing some deals in more major Ontario market, so you've got to accept a lower yield. The deals that we're going to do in New Brunswick or Nova Scotia or Prince Edward Island are going to have very healthy yields.
Okay. And the 2 acquisitions you did, like where you took your interest from 10% to 50% with the pension fund in New Brunswick, did you do those at book, IFRS book? Or how did they sort of relate to that?
No, because -- no, they were done -- I mean, it was essentially negotiated with the third-party pension fund, and our price essentially mimicked that on the other side. But we're still enhancing returns on -- by doing this transaction and increasing our interest in properties that we know very well and have redeveloped over the years.
Mike, on 1 of the 2, we had to promote so that obviously enhanced our return. So we organized an LP in 2009 when capital was very, very precious and -- but we had to promote built-in. And because the pension -- the guys are coming in and buying 50% at a much higher price than their original cost, we were able to take advantage of the promote to enhance our return.
Your next question comes from Jenny Ma with Canaccord Genuity.
Michael, when you're talking about your focus on secondary and tertiary markets, particularly Atlantic Canada, aside from sort of population growth outlook, what else do you look for when you're assessing these markets or just monitoring these markets as far as which are the attractive secondary and tertiary markets to be in versus one that you would not want to enter?
Okay. So I guess our focus is what we call primary Atlantic Canadian markets like -- which I guess sitting in Toronto, you're looking -- you're calling that secondary market, which is fine. I guess that's a proper definition, so okay. So second, we're looking for sustainability. We're looking, obviously, for growth. And then ultimately, it's the retailer that makes the decision, and it's not the developer. The developer could dream about whatever building X, Y, Z, but if the retailer is not there to sign up and commit and open a store and operate, then we're going nowhere. So the retailer makes the ultimate call, and it's all about retailer demand. So if we have no retailer demand, we're going to go a lot slower in the market. We're going to work on the markets where we have retailer demand, where retailers are nudging us or telling us, "I want a new store" or "I'm new to the market. I want to open locations." That's how our business operates. And again, there are markets where we'd do an offer at interesting redevelopment opportunities, but we didn't believe that the market is going the right way, and we'll pass. So we have to believe in the market. That's step number one. Then we have to believe, obviously, in the location within the market.
Do you find that you're often in agreement with the retailers as far as which markets are ones that anyone would want to be in?
Yes, I don't think we've ever sort of not in an agreement with the retailer. We have been in disagreement over retailers that have told us to go get a site, and we said, "We don't like it", and we passed on it. But it's pretty obvious, I think, what markets you want to be in and what markets you got to be very careful about within Atlantic Canada. And if you've been doing business like we have for so many years and are on the ground there, it's kind of second nature where you got to be and where you don't want to be.
Okay, that make sense. And then some of the question that Mike Markidis had about the KFC, I was also trying to figure out the short-term NOI impact. So Floriana, if you can get back to me on that, that will be great. But also, I was wondering when you look at the 9 sites that are expected to be read about in the future, are those just going on a month-to-month lease? And then what would be the time frame that, that splits up these 9 from the first 7 that are going to be immediately developed? Are we talking 12, 24 months? Are we talking sort of 36 months plus?
So on the back 9, there are a few that are month-to-month in there. So there will still be revenues from those, but longer-term plans for those back 9 are yet to be determined. For the ones that we're redeveloping immediately, we have either another national retailer that we're going to be starting redevelopment for that retailer on. Or in many of the cases, it's actually KFC itself that wants to redevelop the site. So we'll ultimately have a new long-term lease with KFC there. But the back 9 is yet to be determined. Could there be some further sales of some of the back 9? A lot of them are very good locations and we should be able to redevelop. We just don't necessarily have a plan yet on them, but 24 months or so, I guess, would be fair to say on those back 9.
Okay. And would the redevelopment be consistent with the property type that's already on it? Or is it going to be substantial intensification or conversion of use, you think?
It'll probably be both. It could be both.
Heavy intensification sites have been sold or will be sold. I don't believe that we're going to undertake the intensification. So on the back 9, one will be expropriated actually or is in the process of expropriation. And there are 3, I think they're going to be sold, and the balance are -- we're working redevelopment and we have -- there's sometimes a land assembly angle around them as well that has to be worked, so we're not there yet.
Okay. So basically it remains to be seen, and you're keeping the leases short term to maximize flexibility.
Yes, some of them. Some of them don't, but there are a few on those back 9 that have month-to-month leases in place with the tenants there. There will still be revenue on some of them.
Okay. And then my last question is with the same-property NOI growth. Are you still confident in maintaining so that 1% to 2% long-term annual growth that you've guided to in the past?
Generally, yes. Clearly, we're still going to have an impact in 2018 for the 2 big lease bios that we did. So that's still going to be an impact in 2018. So I'm certainly thinking that we're going to be at the lower -- definitely at the lower end of things for 2018.
Are you able to sort of zone in on sort of which time frame in 2018 you expect that income to come back? Is it like back half? Or Q3, Q4? Or is that still to be determined?
One lease opens in April and the other is fall, so it's a mixture.
[Operator Instructions] Your next question comes from Hossein Aram from Richardson GMP.
Can you remind me how much is the [ weighted ] of your leasing contract maturity like, 1 year or less than 1 year at innovative approach?
So we've got, I think it's approximately 6-year lease maturity.
Okay. And for the -- so in the backdrop of the current situation when you reset the rates, do you guys have a pricing cover? Or if yes, how much -- what's the outlook for 2018 as an average you can increase the rent rates?
To answer that, there is no uniform average. We're really looking at a deal-by-deal, site-by-site, market-by-market. If you look in the MD&A, you'll see some very positive leasing spreads we realized over 2017 across different categories, but we don't run the business that way. This is pure retail play. When you're in pure retail, you're not like office or residential and say, "I'm going to increase it by 3% or 4%." It depends on the value of your site and what kind of renewal contract you have. In some cases, we have 6 renewals that are already priced and others to be negotiated. So there's no uniform or consistent approach here.
Perfect. And my last one is, in your budget for 2018, how much capital you are deploying for the new project?
We're deploying a very typical amount of capital. We spent about $40 million -- $30 million to $40 million a year on capital, and that usually requires in the range of $10 million of equity.
And there are no further questions at this time. I'm going to turn the call back over to the presenters.
Thank you. In conclusion, we continue to offer a very different real estate investment opportunity with our focus on per unit growth value creation to very accretive developments and redevelopments. Plaza does not buy finished product from third-party developers or from related parties at low cap rates as we are firmly 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 lease maturities. We have consistently demonstrated our entrepreneurial abilities by adapting to market conditions in order to grow our business. Insiders hold an important ownership position and look forward to growing Plaza 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.