SmartCentres Real Estate Investment Trust

TSX:SRU.UN

Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q1 2025 Conference Call. I would like to introduce Mr. Peter Slan. Please go ahead.

Good afternoon, and welcome to our first quarter 2025 results call. I'm Peter Slan, Chief Financial Officer. I'm joined on today's call by Mitch Goldhar, SmartCentres' Executive Chair and CEO; and by Rudy Gobin, our Executive Vice President, Portfolio Management and Investments.

We will begin today's call with some comments from Mitch. Rudy will then provide some operational highlights, and I will review our financial results. We will then be pleased to take your questions.

Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A. This also applies to comments that any of the speakers make this afternoon.

Mitch, over to you.

Thank you, Peter. Good afternoon, and welcome, everyone. As you have seen from our results, it was a sequential quarter of strong performance with our teams focused on all aspects of our portfolio as well as the needs of our tenants as those needs evolve.

The SmartCentres platform built on the high-quality covenants of national retailers continues to generate high on-site customer traffic volumes and huge in-store sales volumes. That bodes well for future quarters as we further solidify our dominance of this sector with the continued expansion of our value-oriented retail offering, already endowed with carefully selected Anchors in grocery, general merchandise, pharmacy, apparel, banking, quick service restaurants and more. The seeds of our positioning and the resilience were planted many years ago, guided by our belief that providing value and convenience to all Canadians is good business.

The first quarter performance reflects this in many different metrics. Same Property NOI growth of 4.1% all in or 6.7%, excluding Anchors, positive leasing spreads of 6.3% all-in or 8.4%, excluding Anchors, near 70% of the 2025 lease maturities already executed -- already extended. 98.4% occupancy for in-place and executed deals, cash collections above 99%.

And in another milestone, signing and taking occupancy, Walmart has their first presence in South Oakville at our South Oakville Center location at Third line in Rebecca with a scheduled grand opening this fall. And just 2 weeks after the quarter end, Costco took possession of their premises at our 80-acre Winston Churchill and 401 Center, formerly occupied by Rona and have commenced fixturing with a planned opening later this year. This center is now anchored by a large Loblaws, Walmart and Costco.

One way or another, Canadians appreciate good value. And when it comes to value, SmartCentres is the go-to for retailers and shoppers alike.

On the real estate development side, we are confidently moving forward with various projects, several in the exciting construction phase. We also continue to enhance underlying value with additional land use permissions across the platform. This means that during the period, we further secured things like mixed-use permissions, adding to the 59 million square feet already zoned, possibly the largest inventory of future growth of any Canadian real estate company. When the time comes, this lucrative inventory will be more difficult to ignore.

Active developments include the 340-unit ArtWalk Condo project, which works its way to grade. As previously reported, 93% of the units are presold with substantial deposits. Also worth mentioning, our recently completed 458-unit Millway apartments is now 96.5% leased and performing ahead of budget.

Construction of our Vaughan Northwest townhomes with our partner is progressing well with 4 more closings taking place in the quarter, bringing the total to 90% of the presold units now closed. In addition, we are continuing to move forward with construction of the 224,000 square foot Canadian Tire flagship in Leaside, which will be completed and pictured for opening in the second quarter of 2026. And 6 SmartStops are under construction with 3 opening in Q2 of this year. Once open, that will bring the gross square footage of the 14 projects to near 1.9 million square feet at 100%.

Simultaneously, we have engaged in discussions with potential buyers for mostly nonoperating projects valued at approximately $100 million, which, if satisfied, could close before year-end.

While the business continues to grow organically and through new income-producing developments, we carefully manage our debt and debt-related metrics. In that regard, we have improved our financial flexibility and increased our unencumbered asset pool to $9.6 billion, which Peter will speak to in a moment.

But before that, let me turn it over to Rudy for some more operational highlights. Rudy?

Thanks, Mitch, and good afternoon, everyone. As Mitch mentioned, the first quarter was once again a standout in many areas and related operating metrics. Tenant demand for space remains strong with 178,000 square feet of vacancy leasing in the quarter, delivering high-quality income across all provinces with a cumulative 98.4% occupancy at the quarter end.

Same Property NOI continued its momentum with 4.1% growth overall and 6.7% excluding Anchors compared to the same period in the prior year. With 5.3 million square feet of space maturing in 2025, the REIT has already extended 68.4% of its leases by the end of the quarter with rental spreads of 8.4%, excluding Anchors, 6.3% all in.

Cash collections continued to exceed 99% in the quarter. And on a more exciting note, as Mitch mentioned, shortly after the quarter end, Costco with a 20-year initial lease term, took possession of the ex-Rona space at our 550,000 square feet or 650,000 square feet shopping center with Loblaws at Winston Churchill and 401, with opening scheduled for this fall. Walmart also with a 20-year term, took possession of the ex-Target space in our South Oakville Center during the quarter, and it too plans for a fall opening.

As we have mentioned recently, the relaxation of grocery restrictions will not only continue to benefit large open format retail, but we believe will also accelerate the pace of tenant demand and customers to our center, maintaining strong cash flow and high occupancy.

Generally, we have also been adding to the portfolio and upgrading uses with medical, daycare, entertainment, health and beauty, fitness, pet stores and more.

Our Premium Outlets continue to excel in driving traffic with improving tenant sales, leading to strong growth in EBITDA and value to the REIT. As mentioned before, tenant sales has our Premium Outlets in Toronto in the top 3 highest performers of all of Canada and remains an outperformer in the Simon portfolio.

You will have heard about the unfortunate HBC news. And while we do not have any such banners in our portfolio, we did have one Saks OFF 5TH location at our Toronto location, Premium Outlets, for which we have received strong interest from multiple tenants given that the center was 100% leased. Based on our discussion with tenants, we expect replacement rents to be in the 3x to 4x higher than the prior tenant.

Overall, the REIT continues strengthening its cash flow and stability while reducing risk through strong rental lifts, higher covenant quality and introducing new brands and more grocery. We expect this momentum to continue throughout the year.

Thank you, and I will now turn it over to Peter.

Thanks, Rudy. The financial results for the first quarter once again reflect the strong performance in our core retail business. For the 3 months ended March 31, 2025, net operating income increased by $7.4 million or 5.5% from the same quarter last year, primarily due to lease-up and renewal activities.

FFO per fully diluted unit was $0.56 in the quarter compared to $0.48 in the comparable quarter last year. The increase was primarily due to higher NOI and changes in the fair value adjustment on our total return swap, partially offset by higher net interest expense and a nonrecurring severance cost related to reduced staffing from some deferred development activities.

For the 3 months ended March 31, 2025, FFO with adjustments, which excludes the townhome profits, transactional gains and losses and the total return swap was $0.54 per unit compared to $0.52 for the same period in 2024. FFO with adjustments per unit was lower by approximately $0.01 as a result of the onetime severance charges that we incurred during the quarter.

We again maintained our distributions during the quarter at an annualized rate of $1.85 per unit. The payout ratio to AFFO is continuing to show improvement. For the 3 months ended March 31, it was 83.8% or 87.6% for the trailing 12 months.

Adjusted debt to adjusted EBITDA was 9.6x for the rolling 12-month period ending in Q1, which is unchanged from last quarter and an improvement from 9.8x for the same period last year, primarily due to continued growth in EBITDA.

Our debt to aggregate assets ratio was 44.1% at the end of the quarter, a 30 basis point increase compared to the same period last year. Compared to Q4, our unencumbered asset pool increased by over $100 million to $9.6 billion as we used a portion of the proceeds from our Series AB debenture offering to repay some maturing mortgage debt.

Unsecured debt, including our share of equity accounted investments, was $4.6 billion at Q1, slightly higher from the prior quarter and represents approximately 84% of our total debt of $5.5 billion.

During the quarter, we also recorded a fair value loss on our investment properties portfolio of $80.1 million. This adjustment was mainly attributable to a delay of development activities for certain properties under development.

From a liquidity perspective, we remain comfortable with our current liquidity position. As at March 31, 2025, we have approximately $856 million of liquidity, which includes both cash on hand and undrawn credit facilities, but excludes any accordion features.

The weighted average term to maturity of our debt, including debt on equity accounted investments, is 3.3 years. Our weighted average interest rate is 3.93%, virtually unchanged from the prior quarter.

Our debt ladder remains conservatively structured with the recent senior unsecured debenture offering extending our weighted average term to maturity. Approximately 90% of our debt is at fixed interest rates.

Just before we open up the call to questions, I want to touch briefly on our development projects that are underway. As in previous quarters, we have updated our MD&A disclosure focusing on those development projects that are currently under construction.

As you will see on Page 17, there were 10 projects under construction at the end of Q1, unchanged from last quarter. We expect three self-storage facilities to open during the second quarter of 2025, two of them in Toronto and one in Dorval, and I believe one of them has already opened -- just opened last month, in fact.

The REIT's share of the total capital cost of these 10 development projects is approximately $515 million, with our share of the estimated cost to complete standing at $275 million.

And with that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?

[Operator Instructions] The first question is from Lorne Kalmar from Desjardins Capital Markets.

I was wondering -- you provided a little bit more color on the Same Property NOI changes by segment and retail Premium Outlets, multi-res and self-storage. I might have missed it, but could you provide the actual Same Property NOI growth percentage by each of those categories?

Yes, Lorne, we don't disclose that breakdown. But of the 4.1% overall Same Property NOI growth, about 3/4 of it comes from our retail portfolio, which includes the Premium Outlets and the other 1/4 comes from apartments and self-storage.

And then just on the occupancy decline. I know everything is still humming along, but I figured that stood out a little bit. Could you give us a little bit more color on what drove that quarter-over-quarter?

You mean the drop of the 98.4%?

Yes. I think it ticked down a little bit.

Yes, it's minimal, and it's just seasonal related.

I did notice that Toys"R"Us was pulled out of the top tenants. Does that have anything to do with it? Or what happened there?

No. No, because those were pretty much leased almost immediately. Well, 2 of the 3, I think, that we got back were leased right away. So it didn't really move the needle, the toys thing. No, it was just a variety across very widely distributed across the portfolio related to the seat time of year.

Okay. And then just last one for me. The Premium Outlets has been a standout, probably lapping some tough comps. Is there any concern about the impact of the broader macro uncertainty might have on the performance of those 2 assets?

Well, in terms of -- I mean, Toronto is just wonder child that I don't think any of us could have ever expected or predicted. So we are actually -- I don't know if we mentioned this in this or not, but we are looking at potentially expanding it just so from the point of view of your question. And that's not going to rise or fall over interest. It's going to rise and fall over getting just the approvals. But I guess if there's really a recessionary type situation, maybe, but a little bit. But it's -- our sector tends to generally attract more people. They may spend a little less per trip, but more of the population shops at our centers when there's budgetary types of economic conditions.

So we usually get a little bit more actually upside as people move away from full price retail. We're sort of the beneficiaries of that. So hard to predict on that particular asset. But in general, we're not concerned about some tough macroeconomic conditions.

The next question is from Sam Damiani from TD Securities.

Maybe just a follow-on on the sort of topic of a recession. I think it was mentioned. The portfolio is a bit different today than it was 15 years ago. But if you had to sort of look out into a potential economic slowdown over the next year and compare it to what we saw in 2009, I mean, what would be the main differences as it relates to SmartCentres?

I mean our locations are more mature. We're surrounded by much -- each one of our centers, I don't know what percentage -- a good question. What percentage of our centers we owned and existed in 2009, but I bet you a lot of them are much more mature. There's a lot larger populations around them and still growing. So I mean, I like our positioning then, frankly. We're a go-to when people don't want to feel that they're being anything but getting the most for their money, we're a go-to when people are watching and on a tighter budget. And now there's larger populations around the majority of our centers. I did like our positioning back then, but I actually -- now that you're asking, really like our positioning now if that were to, in fact, occur.

And just broadly as it relates to the shopping center industry generally in Canada, how would you sort of call it on a relative basis from 15 years ago? How much more insulated is the business from impacts, would you say?

I think the industry is probably a little better positioned now in general. I mean, obviously, you divide the world up into enclosed fashion discretionary purchases enclosed malls and value-oriented in our case, unenclosed. And then you've got strip centers and solely smaller food-anchored centers. But so much retail has been redeveloped, very -- population has grown quite a bit over the last 15 years and not a lot of retail has been built. So on a per capita basis, I don't know if anyone's done the calculation recently, but I would say there's probably quite a bit of less retail per capita now than there would have been in 2009.

I know that -- I think we were somewhere in the 15 square feet per capita back then around then. I don't know where we are now, but I would say we're probably -- I don't want to guess, but we're somewhere between probably 11 and 12.5 or something like that. So I think the industry for all kinds of reasons, no matter which sector you're in is better now than they were in 2009. I just think there's just much less square footage per capita. But I don't know if I'd want to be in every one of the sectors if we go into a tough economic period. But I do like our positioning with the Walmarts and the value-oriented grocery and winners and those in the Dollaramas, which are the core of our portfolio. I do like that a lot. I don't want to illuminate on any other possible sectors. But I do think everyone is better off. The industry is better off now than it was in '09.

Those are helpful points. And the other question I had is just on the HBC spaces, thinking of the traditional large department store spaces that inevitably will be hitting the market, at least some of them. How do you think that will divert retailer attention away from pursuing newly constructed stores? Are you seeing the Walmarts and the Canadian Tires look to those opportunities and maybe hitting the pause button on some development opportunities?

No. No. I mean, I don't want to be so absolute, but I would just say no. I think if those get taken up, I think they're in -- most of them -- a lot of them are in markets that they're not in, the majority of those retailers you named. So they would just be entering virgin territory. And I don't know that how much of that's going to actually happen. This is not a case of Target leaving and putting a huge amount of vacancy on the market or something like that. This is very -- a lot of those units are very much unique multilevel urban underground parking, if any. So I don't see that, Sam, really being an issue in this particular case.

The next question is from Pammi Bir from RBC Capital Markets.

Just coming back to the occupancy commentary given the strength that you have seen in demand, are you envisioning occupancy trending back up over the next few quarters and maybe just narrowing the gap to the committed levels? Or do you see it kind of stabilizing where it ended in Q1?

Well, we don't have that much -- we don't have that far to go up. But I'll let Rudy chime in, in a minute, but I think a big potential number will be -- for us will be in the next year or so, maybe 1.5 years, we'll be leasing up some large vacancies, some of which we've done and we've told you about. We're getting enticed on some of our properties for development. So they may end up maybe turning into retail if we're -- if we see the value in doing that. So it's not necessarily going to change occupancy, but it will certainly increase NOI and development because a lot of the interest is -- we have a lot of interest in new builds.

So we'll be adding square footage. It will move occupancy up. But between 30,000, 40,000 to 120,000 square feet at a time because that's what the majority of the new builds are going to be. So over the next year, 1.5 years, we'll probably do quite a bit of that. So yes, that will move occupancy but slowly, obviously, because we're going to be adding square footage at the same time, but they'll be 100% leased.

So I think we want to be careful because we want to manage expectations, but we do have quite a few things cooking. And we feel that the occupancy of this quarter and last quarter, they're not that far apart, are probably reflective of where we're going to probably be over the next few quarters and more. Rudy, do you want to add anything?

Tough to add to that, Mitch, but I was going to say may be a little bit of softness in the immediate future, like we talked about the Saks OFF 5TH, which obviously will get leased up, but there will be a little gap in time. But if you're looking out to the end of the year, I think it will be an uptick. And like Mitch said, the amount of new builds from grocers and TJXs and Dollaramas and Shoppers and so on is really also -- which, by the way, is mostly on lands we already own. So that will -- and its intensification of lands we already own and building out some raw land within our shopping centers is only going to drive us to -- or drive tenants demand for whatever remaining vacant space there is. But again, there isn't a long way to go given that we're at 98.4% committed, but we do see an uptick by the end of the year, yes.

Great. That's helpful. And Mitch, just coming back to your comments around the -- I think you said $100 million of potential dispositions by year-end. Can you expand on that? Which markets -- it sounds like these are lower yielding or no yield sort of development density type sites, but it sounds like you're a little bit more confident in actually transacting. So maybe what's changed in your mind as well between, I guess over the last few months?

I mean there's -- yes, they're not producing right now these assets that are potentially being sold. So I just think it's a slight improvement in the marketplace, a little bit more confidence by others to buy to step up. So yes, I mean, I think that's what it's a reflection of. I do think it's -- I do feel that that is a trend. So obviously, as we've talked before, we're interested on the right terms. So those deals got done. We like them. They're in conditional periods, so you never know.

Right now, I mean, anything that could -- anything happening in the market in the news can spook the kind of people that are purchasing these. I mean they're solid, but they're still -- everyone's got their antenna pretty high. So these could fall away, but we went this far because we don't think they're going to fall away.

So we think there's probably better than a 50-50 chance that these people will firm up and close on these transactions. And I hope I'm right about a slight improvement to the market, and we'll be able to do some more transactions. I will say because you might be thinking, I don't see a lineup for high-density stuff, land at the moment. But maybe some mid-density rental potentially at the right price, maybe by -- maybe this year, we'll see a little bit of that.

Last one for me, just on ArtWalk. Can you just remind us the total expected proceeds on that project? And just maybe in terms of how you underwrite, have you made some provisions or some assumptions on some of those units maybe not closing or just some update on that would be helpful.

I'll answer the second half to stall for Peter to answer the first half. Yes. So we absolutely analyze the many different -- what if scenarios, if we don't -- if people do default. So with those -- with that analysis and that information, we are confidently going forward with the completion of the building because we feel that with the deposits that we could still sell like resell any of the units at an attractive price and get out and be whole or we could rent them.

And I don't know whether we mentioned this or not this time, I don't know. I don't think we did. But we did shrink the building at one point, it was a much bigger building. So we shrunk the -- like the repetitive, we shrunk a bunch of repetitive floors to just match up basically the sales that we have almost. And for good reason, we didn't do it exactly. And so it's not really that big a building in the end of the day, and these people do have big deposits. We do anticipate most people will close, but we're ready if they don't, and we're okay if they don't from various points of view.

Peter, was that long enough for you to answer the full stuff?

Yes. And Pammi, on the first part of your question, as we've discussed, it's 340 units at ArtWalk, 93% presold. And the average sales price was a little north of $1,100 a foot. So that should give you some color around gross proceeds.

[ 75 ].

Okay. No, that's great.

I wanted you to know, Pammi, as well that we are building extra parking there as well. So it's not some home run. So just don't do the math on that straight up because it's a strategically located building. So we built a little extra parking there for the betterment of the overall project. So we can take away some of the surface parking and make way for future phases. So just keep that in mind.

There are no further questions in the queue.

Okay. Does that mean there are no further questions still?

Correct. No further questions at this time.

Okay. Well, just before we end the call, I wanted to let you know that we will be hosting our AGM next week on Wednesday, May 14. We hope to see many of you there. Please feel free to reach out to any of us if you have any further questions, and have a great day. Thanks.

Ladies and gentlemen, this concludes the SmartCentres REIT Q1 2025 Conference Call. Thank you for your participation, and have a nice day.