Plaza Retail REIT (OTC:PAZRF) Q2 2022 Results Conference Call August 4, 2022 10:00 AM ET
Kimberly Strange – General Counsel and Secretary
Michael Zakuta – President, CEO
Jim Drake – CFO
Conference Call Participants
Jenny Ma – BMO Capital Markets
Good morning. I would like to welcome everyone to the Plaza Retail REIT Second Quarter 2022 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 Kim Strange, Plaza’s General Counsel and Secretary. Please go ahead, Ms. Strange.
Thank you, operator. Good morning, everyone, and thank you — good morning, everyone, and thank you for joining us on our Q2 2022 results conference call. Before we begin today, we are legally obliged to advise you back 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, 2021, and management’s discussion and analysis for the period ended June 30, 2022, which are available on our website at www.plaza.ca and on SEDAR at www.sedar.com.
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 Plaza. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similarly titled measures reported by other entities. For more information, please refer to Part VII of our MD&A for the period ended June 30, 2022.
I will now turn the call over to Michael Zakuta, Plaza’s President and CEO. Michael?
Thank you, Kim. Good morning. Plaza continues to be very active in pursuing value-add opportunities across Ontario, Quebec and Atlantic Canada. We are excited about our growth prospects and our robust pipeline featuring grocery-anchored and essential needs open air centers. We continue to benefit from the proven resilience of our portfolio and our well-conceived and conservative debt structure, both of which add to our confidence in our ability to navigate through current economic headwinds.
Plaza’s foundation is that we develop, redevelop and own well-located retail properties in the best locations within sustainable markets. This allows us to attract and retain Canada’s best essential needs and value retailers. We have a long track record of successfully reinventing challenged retail properties, developing new retail centers sourced from retailer demand or making opportunistic acquisitions from owners looking to exit from retail properties.
47% of our portfolio consists of new developments, 42% from redevelopments and 11% from opportunistic acquisitions. We had a successful second quarter and continued to make progress with our growth initiatives.
During the quarter, we completed 310,000 square feet of leasing of new space and renewals, including the backfilling of 63,000 square feet of previously vacant space. Year-to-date, we have leased 706,000 square feet, 460,000 square feet of renewals, 100,000 square feet of new space, when we think of new space and 145,000 square feet of backfilling, a previously vacant space. Our development projects are progressing well despite supply chain challenges and retailer demand remains very strong for our properties.
You will find recent photos of a number of our projects posted in the Q2 2022 presentation in the Financial Reports section of our website. I would like to draw your attention to 5 projects, in particular that are highlighted in that presentation. First, ordinary completion of the new holding Corp Plaza in Bedford, Nova Scotia, which originated for an order from Loblaw for a new format superstore; second, we’re well underway with the construction of our new project in Chicoutimi that has been leased to Princess Auto, Dollarama, [indiscernible] and [indiscernible] Bank; third, our transformation of Tri-City Center in Cambridge, Ontario is moving quickly.
We have relocated [indiscernible] and now under construction on a dollarama-anchored strip and a new pad for Wendy’s; fourth, in Sault Ste. Marie, we have completed the lease-up of the former Lowes store with Princess Auto, Dollarama and Winners, HomeSense.
Construction is progress and these retailers are anticipating opening in 2023. Finally, under construction with new stores for the Brick and Valley Village at our project in St. Jerome.
Since our last call, we have purchased land in [indiscernible], Nova Scotia, [indiscernible], New Brunswick and [indiscernible] in Ontario. All 3 of these are new grocery anchor developments that we plan to build in the next 2 to 3 years. And all 3 of these are initiated by grocers looking to us for help. It’s important to reiterate that a big part of our growth is driven by grocers and other essential needs retailers seeking new store openings. Demand for new stores from Canada leading essential needs retailers remains very strong.
And we’re confident in our ability to continue to source new projects. I will now turn the call over to Jim Drake, Plaza’s CFO. Jim?
Thank you, Michael, and welcome, everyone. We had another good quarter and our key indicators all provide evidence of that. Overall committed occupancy and same asset committed occupancy are both at 96.6%, up 70 bps and 110 bps, respectively, over last year. Leasing demand and activity remains strong with overall renewal spreads year-to-date at 2.9%. Same asset NOI is also up 2.6% over last year.
And our debt to total assets ratio has improved to 50%, down 300 bps over last year. When looking at the financial results, it is key to remember that we had $2 million of lease buyers last year, which increased NOI, FFO and AFFO last year. Excluding this, and excluding bad debt from last year as well. FFO and AFFO per unit are up 3% for the quarter, with the resulting year-to-date payout ratios at 71% of FFO and 83% at AFFO. Under our development program, we continue to advance a number of our active projects, and we closed on a parcel of land in [indiscernible], Nova Scotia, a community just with Halifax for a [indiscernible] green development.
And as Michael mentioned, subsequent to quarter end, we also closed on land in New Brunswick and Ontario, both of which will also be grocery-anchored new developments.
Our liquidity remains solid and at quarter end totaled $53 million, including cash, operating line and unused development and construction facilities. We also had $17 million of unencumbered assets. For debt, at quarter end, we had $17 million of long-term mortgages maturing for the remainder of this year. $15 million of those mortgages relate to freestanding pharmacies where the existing loan to value is 30%, and the existing interest rate is 4.76%. We have commitments to refinance these mortgages at 65% loan-to-value to generate some capital and we’ll close on these later this month.
The rates on those new mortgages should be similar to or the expiring rates. In 2023, we have $29 million of mortgages maturing at a weighted average interest rate of 4.75%. Loan to value on these mortgages is 50%. So we are confident and we will be renewing and again at rates that are likely similar to or below the rates. We have always utilized a conservative debt management strategy, which will continue to mitigate our exposure to interest rate volatility.
We prefer to lock in fixed rates for longer term, always with an eye on matching lease terms and maintaining a balanced maturity ladder. Our individual mortgage amounts are relatively small, reducing interest rate risk on individual roles.
We have limited unsecured debt and our floating rate exposure is limited to our operating line and development and construction facilities. Finally, on cap rates and valuations, we were not overly aggressive with our IFRS valuations and cap rates were compressing. So the current pressure on cap rates for some property types should have less of an impact on us. Our starting point, again, was relatively conservative. We also continued to see strong demand for essential needs and convenience assets such as ours.
Regardless with the increase in government accounted bond yields we saw in the second quarter, we saw a nominal increase in cap rates as well and took a $6 million write-down this quarter. Our weighted average cap rate is now 6.77%. Those are the key points relating to our results for the quarter and year-to-date.
We will now open the lines for any questions. Operator?
[Operator Instructions] Your first question comes from Jenny Ma, BMO Capital Markets.
Jim, thank you for that color on the maturing mortgage. It’s very helpful. My question is about the debenture — convertible debentures that are going to be coming due in March. Just wondering what your thoughts are around that piece just given the LTVs and the maturities and the unencumbered debt doesn’t quite add up to the $47 million maturing. So just wondering what your thoughts are and what started any negotiations or considerations for what to do with that? Or is it still a bit too early?
It’s a bit early, but we’re looking at different options. We have a few different options that we’re analyzing now. We’ll have some further information for you when we’re a little bit closer to equity next quarter.
Okay. Great. With regards to acquisition opportunities, [indiscernible] has historically picked up some enclosed mall opportunities that you can [remall] and redeveloped. I’m just wondering, given the current environment, are you seeing any more of these opportunities pop up and whether or not pricing is getting more favorable for that?
So we’re seeing opportunities. We’re always pursuing enclosed mall opportunities that we can convert to open air. But those deals are or how do you say are did have to be priced right. It’s an up price rate, we can’t do the transformation. So we always have our finger on a couple and eventually, they usually come to us.
What we’re seeing a little bit more of is just opportunistic deals where there’s a lot of vacancy in the strip and some investment and leasing effort is required. We’re definitely seeing that. And we’re seeing a lot of demand, though, for new product, which means that we’re buying greenfield space of [indiscernible], land or we’re buying a building that’s going to be torn down, like we bought a Boeing alley well in Ontario, we’re going to tear it down and that’s creating in fact, greenfield development. So that’s really what we’re seeing. I haven’t seen a flood of enclosed mall to strip opportunities.
There’s always again 1 or 2 sort of in our vehicle vision. And hopefully, we’ll be successful somewhere down the road.
So Michael, if I’m hearing you correctly, it sounds like when you weigh in closed mall conversions versus the strip carry downs and greenfield that enclosed malls probably still aren’t the best opportunities as it stand given [indiscernible].
They’re very good opportunities. And what they’re interesting in any of these redevelopments are interesting opportunities because you do have revenue while you’re doing your work, whereas when you do a greenfield, you buy it, you’ve got to go through all the municipal processes and everything else, and you have to construct.
So it takes time. So we’re very interested in the enclosed mall style opportunities, but it really has to be repeating itself has to be priced right. And again, we chase some stuff and a lot of back and forth. And when it’s right, we’re able to close. So those opportunities are out there.
Again, it’s all a matter of timing and pricing.
Okay. Great. And then finally for me, considering what you’ve seen with inflation, are you starting to see that factor filter into your lease negotiations, I guess, particularly for some of the new builds, whether or not we should expect to see some upward pressure on rent growth as a result of inflation.
We’re definitely dealing with inflation, inflation. We’re seeing higher rents from large retailers because they recognize that the deal cannot be done unless rents are higher, and we’re purely able to command some higher rents on some of the existing product. So we have definitely rent inflation. No question about that. We’re seeing it, and that’s part of our business today.
Do you see it coming into the base rent? Or do you see an expansion of the annual rent step embedded in the leases or both?
Well, it starts with base rent. When we’re doing a new development, we’re very focused on what we’re getting upfront. So again, you’re seeing higher rents to start. We’re asking for higher bumps going forward. In some cases, we do have a CPI formula on renewals.
In the past, we would we would — we often like to fix the renewal rent so that there is no dispute with our customers. Today, we’ve backed off that a little bit and looking more at fair market value, even though that could put us in a dispute situation with our good customers, I think we have no choice.
[Operator Instructions] Mr. Zakuta, there are no further questions at this time. Please go ahead.
Well, thank you, operator. This concludes our call.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.