CT Real Estate Investment Trust : Q1 2024 Conference Call Transcript

CT REIT First Quarter 2024 Earnings Results Conference Call

Tuesday, May 7, 2024 - 8:00 AM ET

DISCLAIMER

The information contained in this transcript is a textual representation of CT REIT's (the "REIT") Q1 2024 results conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. The information set out in this transcript is current only as of the date of the webcast and may be replaced by more current information. The REIT does not undertake to update the information, whether as a result of new information, future events or otherwise. In no way does the REIT assume any responsibility for any investment or other decisions made based upon the information provided on the REIT's web site or in this transcript. Users are advised to review the webcast (available at www.ctreit.com) itself and the REIT's regulatory filings before making any investment or other decisions.

FORWARD-LOOKING INFORMATION

This document contains forward-looking statements that involve a number of risks and uncertainties, including statements regarding the outlook for CT REIT's business and results of operations.

Forward-looking statements are provided for the purposes of providing information about CT REIT's future outlook and anticipated events or results and may include statements regarding known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those indicated. Such factors include but are not limited to: general economic conditions; financial position; business strategy; availability of acquisition opportunities; budgets; capital expenditures; financial results, including fair value adjustments and cash flow assumptions upon which they are based; cash and liquidity; taxes; and plans and objectives of or involving CT REIT. Statements regarding future acquisitions, developments, distributions, results, performance, achievements, and prospects or opportunities for CT REIT or the real estate industry are forward-looking statements. In some cases, forward- looking information can be identified by such terms such as "may", "might", "will", "could", "should", "would", "occur", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue", "likely", "schedule", or the negative thereof or other similar expressions concerning matters that are not historical facts.

CT REIT has based these forward-looking statements on factors and assumptions about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. Such factors and assumptions include but are not limited to: whether there continues to be a risk of recession in Canada and the timing and extent of further changes to inflation and interest rates; that tax laws will remain unchanged; that the REIT will continue to manage its liquidity and debt covenants; that conditions within the real estate market, including competition for acquisitions, will normalize to historical levels in the near- to medium-term; that Canadian capital markets will provide CT REIT with access to equity and/or debt at reasonable rates when required; that the redevelopment and related activities with respect to Canada Square will proceed as planned; and that Canadian Tire Corporation Limited (CTC) will continue its involvement with CT REIT on the basis described in its 2023 Annual Information Form.

Although the forward-looking statements contained herein are based upon assumptions that management of CT REIT believes are reasonable, based on information currently available to management, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond the REIT's control, that may cause CT REIT's, or the industry's, actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the factors discussed in section 12 of the REIT's 2023 Q4 Management Discussion and Analysis and under the "Risk Factors" section of CT REIT's 2023 Annual Information Form.

For more information on the risks, uncertainties and assumptions that could cause CT REIT's actual results to differ from current expectations, please refer to CT REIT's public filings available on SEDAR+ at www.sedarplus.caand by a link at www.ctreit.com.

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CT REIT First Quarter 2024 Earnings Results Conference Call

Tuesday, May 7, 2024 - 8:00 AM ET

CT REIT cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also materially and adversely affect its results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward- looking information and are cautioned not to place undue reliance on such forward-looking information. Statements that include forward-looking information do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on CT REIT's business. For example, they do not include the effect of any dispositions, acquisitions, asset write-downs or other charges announced or occurring after such statements are made.

The forward-looking information contained herein is based on certain factors and assumptions made as of the date hereof or the date of the relevant document incorporated herein by reference, as applicable. CT REIT does not undertake to update the forward-looking information, whether written or oral, that may be made from time to time by it or on its behalf, to reflect new information, future events or otherwise, except as required by applicable securities laws.

May 7, 2024

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CT REIT First Quarter 2024 Earnings Results Conference Call

Tuesday, May 7, 2024 - 8:00 AM ET

C O R P O R A T E P A R T I C I P A N T S	discussion of these risk factors which are included in
	their 2023 MD&A and 2023 AIF, which can be found
Kevin Salsberg	on CT REIT's website and on Sedar.
President and Chief Executive Officer
	I will now turn the call over to Kevin Salsberg,
Jodi Shpigel	President and Chief Executive Officer of CT REIT.
Senior Vice President, Real Estate	Kevin?
Lesley Gibson	─────────────────────────────────
Chief Financial Officer	Kevin Salsberg, CT REIT - President & CEO
	Thank you, Justin. Good morning, everyone, and
C O N F E R E N C E C A L L P A R T I C I P A N T S	welcome to CT REIT's first quarter investor
conference call. I thought I would start the call with a
Sam Damiani	little color with respect to what we are seeing in the
market currently. With respect to the economy at
TD Cowen - Analyst
large growth remains muted. Inflation has tempered,
	but it's still above the target rates set by our central
Lorne Kalmar	bank and housing affordability continues to become
Desjardins Securities Inc. - Analyst	further out of reach for average Canadians driven by
high levels of immigration over the last few years,
Pammi Bir	elevated construction costs and excessively long
timeframes that are required to complete new
RBC Capital Markets, LLC. - Analyst
development.
	For some time now market prognosticators have
P R E S E N T A T I O N	been considering when interest rate cuts will begin
	and by how much we should expect rates to decline.
Operator	The answers to these questions continue to seem
uncertain and something to be determined at some
Good morning. My name is Justin, and I'll be your
point in the future.
conference operator today. At this time, I would like
to welcome everyone to CT REIT's Q1 2024	A lack of clarity driven by the aforementioned factors
earnings results conference call. (Operator
continues to constrain the property markets and
Instructions) Speakers on the call today are Kevin
transaction volumes remain relatively muted.
Salsberg, President and Chief Executive Officer of
Fundamentals for retail real estate, however, have
CT REIT; Jodi Shpigel, Senior Vice President, Real
been strong as increased population translates into
Estate; and Lesley Gibson, Chief Financial Officer.
new customers for our tenants and the high cost to
Today's discussion may include forward-looking	build, coupled with the conversion of commercial
assets into residential development sites have fueled
statements. Such statements are based on
a supply demand imbalance that has favored
management's assumptions and beliefs. These
landlords of late.
forward-looking statements are subject to
uncertainties and other factors that could cause	Despite the turmoil of this mixed market, CT REIT
actual results to differ materially from such
continues to perform and our Q1 2024 results are yet
statements. Please see CT REIT's public filings for
another example of the stability, reliability and growth
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CT REIT First Quarter 2024 Earnings Results Conference Call Tuesday, May 7, 2024 - 8:00 AM ET

that we have delivered to date, irrespective of market conditions. From our successful IPO through our initial phase of growth to the COVID-19 pandemic and the more recent challenging economic conditions, CT REIT has proven its resilience time and again.

In the first quarter, our durability and performance were once again on full display and I'm pleased to report that we achieved growth in net operating income or NOI of 5.6%, growth in same-property NOI of 4.1%, and growth in diluted AFFO per unit of 4.8%. All in all, a great start to the year.

On the back of these strong results, we were pleased to announce that for the 10th straight year, our Board of Trustees has approved yet another increase to our distributions. The 3% increase is the 11th since our IPO and represents a cumulative increase of 42.3% over that time, which is a true testament of our success and stability over the last 10-plus years. An investor who has been with us since our inception would now be enjoying a 9.25% yield on their initial investment based on our new distribution rate.

And our future continues to look bright. We have over 740,000 square feet of gross leasable area in our development pipeline, comprising one new Canadian Tire store development, 16 Canadian Tire store expansions, one redevelopment and one site intensification for third-party tenant.

With respect to our balance sheet, our low leverage, strong coverage ratios and liquidity position us well to manage our way through this higher for longer rate environment. We only have one debt maturity this year, a $200 million series of Class C LP Units that Canadian Tire holds that will be reset effective June 1, 2024 for an additional five years at a rate of 5.43%. And we have no other upcoming debt maturities until midway through 2025.

The strength of our balance sheet, the visibility of our cash flows and our embedded growth, all makes CT REIT a very attractive option for investors as we continue to navigate these choppy waters.

I'll now turn it over to Jodi and Lesley to provide some additional details on the quarter, our results, and our investment, leasing and development activities. Jodi?

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Jodi Shpigel, CT REIT - SVP

Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce one new investment this quarter. This new investment relates to the expansion of an existing Canadian Tire store located in Donnacona, Quebec. It is anticipated that this $11.1 million investment will be completed by the end of 2025 at a going-in yield of 7%.

In Q1, we continued to focus on our existing development pipeline. Building on the significant progress made in 2023, the REIT currently has 20 projects at various stages of development with three of these expected to be completed this year and most of the balance expected to be completed in 2025 and 2026. These developments represent a total committed investment of approximately $287 million upon completion, $96 million of which has already been spent and $52 million of which we anticipate will be spent in the next 12 months.

Once built, these projects will add in total incremental gross leasable area of approximately 742,000 square feet to the portfolio, 93.8% of which has been pre- leased at quarter end. During the quarter, we extended one Canadian Tire store lease, while maintaining a nearly fully occupied portfolio with our occupancy rate now reaching 99.5%. As at the end of Q1, the weighted average lease term for our portfolio was 8.2 years, which remains one of the longest in the sector.

With that, I will turn it over to Lesley to discuss our financial results. Lesley?

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CT REIT First Quarter 2024 Earnings Results Conference Call Tuesday, May 7, 2024 - 8:00 AM ET

Lesley Gibson, CT REIT - CFO

Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we are pleased with the strong results delivered by the REIT again this quarter. Reflecting on the solid growth within the portfolio, same-store NOI grew 3.0% or $3.2 million. Drivers of the same- store NOI increase were contractual rent escalations of $1.4 million, primarily being the 1.5% average annual escalations included in the Canadian Tire leases with the balance of the growth primarily from continued recovery, capital expenditures and interest earned on the unrecovered balance, which contributed approximately $1.9 million to NOI in the quarter.

Same-property NOI grew by 4.1% or $4.4 million compared to the prior year. This was due to increase in the same-store NOI noted as well as from intensifications completed in 2023. Overall, in the first quarter, NOI grew by a healthy 5.6% or $6.1 million, driven by the increase in same property NOI and the completion of development projects in 2023.

In the first quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 3.7%, which is higher than the same period in the prior year of 3.0%. This increase was primarily due to the timing of the deferred income tax provision amounting to $503,000, which is expected to reverse over the balance of the year.

The fair value adjustment of $23.6 million in the quarter was mainly driven by contractual rent escalations and leasing activity within the portfolio during the period. Investment metrics for the portfolio remained unchanged relative to the 2023 year end. In the quarter, diluted FFO per unit was up 3.4% to $0.331 compared to $0.320 in the first quarter of 2023.

This growth can be primarily attributed to the intensification and developments completed during 2023 and the increased recovery of capital expenditures and interest earned on the unrecovered balance as well as contractual rent escalations from

Canadian Tire stores, other CTC banners, and third- party tenant leases, partially offset by higher interest costs. The growth in AFFO per unit on a diluted basis was strong for the same reasons, coming in at $0.308, up 4.8% compared to the Q1 of 2023.

Distributions in the quarter increased by 3.5% compared to the same period in the previous year. As Kevin already mentioned, we were pleased to announce a 3% increase to the monthly distribution effective with the July 2024 payment to unitholders. This is the 11 such increase, and we're pleased to have been able to raise our distributions at least once per year since IPO.

AFFO payout ratio for Q1 was 73.1%, slightly lower than the payout ratio of 73.8% in the same period last year. This decrease was attributed to the growth in the diluted AFFO per unit outpacing increase in the distribution per unit. In Q1 2024, we continued repurchasing a modest amount of units through our NCIB facility, buying back approximately $3 million of our units below the intrinsic value at an average price of $13.92.

Now turning to the balance sheet. Our interest coverage ratio was 3.57 times for the current quarter compared to 3.70 times in the comparable quarter of 2023. The decrease was mainly driven by the increase in interest expense and other financing charges, outpacing the growth in the EBIT fair value.

The indebtedness EBIT fair value ratio improved to

6.64 times, down from 6.83 times in Q1 of 2023, primarily because the growth of EBIT fair value outpaced the increase in indebtedness. Our indebtedness ratio was up slightly to 41.4% from 40.7% in the same quarter of last year due to the issuance of the Series I debentures, partially offset by an increase in fair value of the investment properties. Our indebtedness ratio continues to be within our target range and considering the current macroeconomic economic backdrop and interest rate environment, we're pleased with the strength of our balance sheet.

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CT REIT First Quarter 2024 Earnings Results Conference Call Tuesday, May 7, 2024 - 8:00 AM ET

Lastly, with respect to liquidity, we ended Q1 with $50 million of cash on hand and $297 million of remains available through our committed credit facility, a further $300 million is available on our uncommitted facility with Canadian Tire Corporation.

And with that, I will turn it back to the operator for any questions.

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QUESTIONS AND ANSWERS

Operator

(Operator Instructions) Sam Damiani, TD Cowen.

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Sam Damiani, TD Cowen

First question, I guess it's probably one I've asked before, which is, just what's your vision for growth over the next decade given the smaller pool of Canadian Tire and third-party owned real estate that could come available or be shaken loose? And what is the REIT's appetite for materially diversifying the tenant base beyond Canadian Tire going forward?

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Kevin Salsberg, CT REIT - President & CEO

Yeah, good morning, Sam. I'm not sure I would characterize the pool as shrinking or smaller. I think we're at a point in time, our -- both the REIT and Canadian Tires are being a little bit more prudent with our capital allocation and spend. There's projects that we're still interested in pursuing, but they've been perhaps deferred or delayed a little bit just in the interest seeing where the market takes us.

I still think there's a huge amount of opportunity pursuing those opportunities that we surface through our relationship with Canadian Tire. We are always opportunistic about what's out there in the market and looking to add to our net lease portfolio unrelated to Canadian Tire. But pricing relative to cost of funds

for the last little while have been -- the disconnect's just being too large.

And then in terms of diversification, I think as you've seen in our first decade, it's something that happens almost naturally in the sense that as we buy or develop more things that have components that are Canadian Tire related, there's also often third-party tenancies within those assets. But that's obviously -- that's often offset by the amount of Canadian Tire related activity that we've done.

So on percentage terms, hasn't really move the needle all that much. So certainly, could ebb and flow as time goes on up or down. But the diversification in and of itself is not a current strategic objective for the REIT. We have continued to lean into the opportunities that we glean through our relationship with Canadian Tire. And over time, if those opportunities change, we will certainly be open to a wider mix of tenancies. But I think Canadian Tire, for the foreseeable future, will make up the vast majority of the REIT's portfolio.

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Sam Damiani, TD Cowen

That's great. I really appreciate that. Very helpful. I guess just on Canadian Tire related growth, could you quantify the potential opportunity in the next three to five years? What kind of trajectory do you think is possible or a range of trajectories are possible?

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Kevin Salsberg, CT REIT - President & CEO

Couple of years ago when Canadian Tire came out with their Better Connected strategy, there was a pretty large capital envelope that came along with that over a three to five-year period, call it. And we made pretty good headway eating into that bucket. Our CapEx spend over the last three years has been slightly higher than our average, I would say. On the go forward, I think it all depends when consumer spending sort of recovers. I think there's still a belief

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CT REIT First Quarter 2024 Earnings Results Conference Call

Tuesday, May 7, 2024 - 8:00 AM ET

that Canadian Tire, over time wants to improve their	─────────────────────────────────
store and supply chain networks.	Operator
	(Operator Instructions) Lorne Kalmar, Desjardins.
And when I say improve, expand the size of their
stores, bring it up to their current prototype, expand	─────────────────────────────────
the availability of different fulfilment channels, buy	Lorne Kalmar, Desjardins Securities
online, pickup in store, greater showrooming, all the
things that we've talked about in the past. So I think	Thanks. Good morning, everybody. Just on the -- I
it's a large opportunity set. I think it's just going to	know you don't have a lot of lease maturities coming
take longer to affect.	up this year and '25, but it looks like the majority of
	them are third-party or non-CTC leases. I was just
With all the number of vend-ins, we can do over time	wondering, given the strength you mentioned in
from Canadian Tire. Probably we've estimated the	retail, what type of lifts are you getting on the ones
pipeline there at 15 to 20 sites. When we choose to	you've done so far and sort of expecting to get done
work with Canadian Tire and trying to buy those	on the remainder through '25?
assets is market dependent and also where we are
within our growth stage and our desire to allocate	─────────────────────────────────
capital in a given year. So no specific guidance there,	Jodi Shpigel, CT REIT - SVP
but those assets also remain available for the REIT
to consider purchasing over time.	Good morning, it's Jodi. Just to answer your
	question, so we had a fair number of renewals this
─────────────────────────────────	quarter that, as you noted, are third-party,
Sam Damiani, TD Cowen	approximately 182,000 renewed. And roughly
	speaking, we're seeing low double digit spreads on
Okay, great. And last one for me. Just on the NCIB,	those renewals. And I think we can expect to see that
it's been pretty steady programmatic approach over	continue just based on the supply-constrained
the last few quarters. Just wondering, is there an	market and the fact that tenants are looking to renew.
appetite to materially step up that activity to take	So we're getting the benefit of that.
advantage of the current publicly-traded valuation?
	─────────────────────────────────
─────────────────────────────────	Lorne Kalmar, Desjardins Securities
Kevin Salsberg, CT REIT - President & CEO
	Okay. And then you'll have to forgive me, because I
I wouldn't say materially, Sam. That's something	don't remember exactly what the typical lift is on a
we've talked about in past quarters as well. Hard to	CTC lease. But given the broader strength in the
consider the trade-off between supporting the units,	market, is there any room to push that beyond
showing the market we believe we're trading at too	current levels when there's some chunkier renewals
wide a discount to our net asset value. But also, we	coming up in '26 and beyond?
understand that our investors are really interested
actually in us increasing our float and increasing our	─────────────────────────────────
liquidity, which is something we're also desirous of	Kevin Salsberg, CT REIT - President & CEO
over the long term. So I think what we've done is
tried to take a modest approach to supporting our	Yeah, Lorne, historically, we've continued on the
unit price, and that's probably what you'll continue to	average 1.5% rent escalations that we enjoyed in the
see from us in the next couple of quarters.	initial term through extension periods. Certainly, the
	1.5% as it relates to what is -- what we're seeing in
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CT REIT First Quarter 2024 Earnings Results Conference Call Tuesday, May 7, 2024 - 8:00 AM ET

the in the leasing market right now has been a hot topic for us and something we've engaged with Canadian Tire in. There's been a bit of a unique attribute to the first couple of sets of renewals that we have had to deal with through 2023 and 2024, and that is that they've been heavily skewed to smaller markets. I think as we get into the '25 and '26 renewals, it's more of an even mix between smaller markets and urban markets. And certainly in those larger centers where we're seeing higher renewal spreads, that's something we'll be addressing with Canadian Tire.

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Lorne Kalmar, Desjardins Securities

Okay. So there might be some potential to see some -- the lifts pick up a little bit.

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Kevin Salsberg, CT REIT - President & CEO

Yeah. I mean, you have to also appreciate the 1.5% of the average over 25 million square feet of Canadian Tire stores. So rolling over 5%, 6% a year, it will take some time for that average to move. But that doesn't mean it's not a worthwhile endeavor and something we're not going to talk to Canadian Tire about.

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Lorne Kalmar, Desjardins Securities

Okay, great. And then I did notice, I think, outside of the one you guys highlight in the press release, there's another project with Winkler, Manitoba. I think that was added to the pipeline. I was just wondering maybe you give a little more color on that project?

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Jodi Shpigel, CT REIT - SVP

Yeah. So as -- in Q4, we added Winkler. And this year we have moved -- added it to the PUD table. So that's a mall in Winkler, Manitoba, it's Canadian Tire anchored and there's an enclosed mall. And so the

development relates to the enclosed mall portion of that property.

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Lorne Kalmar, Desjardins Securities

Right. Thank you. Thank you for the reminder. And then just last quick little one for me. I think capped interest came down a little bit. I think that's probably not entirely unexpected. Is that sort of a good run rate going forward, given the $52 million development spend over the next 12 months?

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Lesley Gibson, CT REIT - CFO

Yeah, Lorne. It's Lesley. That probably is given where we expect developments and the development spend to go for the balance of the year.

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Operator

(Operator Instructions) Pammi Bir, RBC Capital Markets.

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Pammi Bir, RBC Capital Markets

Thanks. Good morning. Kevin, you mentioned the deal flow is still limited and pricing is still disconnected. Can you maybe just talk about maybe what you have seen in terms of maybe what's come your way, maybe any transactions that you have looked at, what sort of pricing have you seen? And just curious, what types of assets are these or even the vendor types? I know there's a lot in there, but just any additional color on the transaction side?

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Kevin Salsberg, CT REIT - President & CEO

It's been a strange market, to be honest, Pammi. It's a little bifurcated right now. You're seeing some assets that are out of favor trade. We've seen some office trades in the last quarter. You've seen a lot of

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CT REIT First Quarter 2024 Earnings Results Conference Call Tuesday, May 7, 2024 - 8:00 AM ET

interest still in grocery-anchored essential needs retail, but there's not a lot out there to buy right now. Multifamily is obviously still very active, probably I would think the most active of the asset classes.

So different pools of capital chasing different things, different buyer perspectives in terms of whether it's a good time to sell or not. We've seen a couple of net lease sites that we've looked at, single-tenant, I would say, mid-market stuff. But we've been surprised by the degree to which we've been off on pricing. We have a view on risk and there are others who are looking at assets very differently. So I think that disconnect is real and there's a couple of things we've gone down the line on. And like I said, we've just been surprised the degree to which we've been off on pricing.

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Pammi Bir, RBC Capital Markets

Got it. In terms of -- just one last one for me. The occupancy pickup this quarter and I think Jodi mentioned it, was that partly driven by the shift of Winkler into properties under development. I'm just curious on the retail side that I think it was a 40-basis point pickup.

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Kevin Salsberg, CT REIT - President & CEO

Yeah, that's correct, Pammi. It's basically just the move of the asset into PUD.

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Pammi Bir, RBC Capital Markets

Okay. And then just on Canada Square, a bit of an uptick there as well. Was that some leasing that was completed in the quarter or --?

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Kevin Salsberg, CT REIT - President & CEO

necessarily.

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Pammi Bir, RBC Capital Markets

Okay. So it's a no big change in terms of the near- term re-leasing of some of that vacancy?

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Kevin Salsberg, CT REIT - President & CEO

No, we're still sticking with our asset plan and the degree to which we can hold onto short-term income for longer is great. But still maintaining that flexibility to have access to the site to redevelopment.

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Operator

And thank you. As there are no further questions at this time, I would like to turn the call over to Kevin Salsberg, President and CEO, for closing remarks.

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Kevin Salsberg, CT REIT - President & CEO

Thank you, Justin, and thank you all for joining us today. We look forward to welcome you to our Annual Meeting of Unitholders, which we will conduct virtually later this morning at 10:00 AM. We hope that you'll be able to listen in. And we look forward to speaking with you again in August after we release our Q2 results. Thank you.

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Operator

This concludes today's call. You may now disconnect.

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It was. I would describe it as short term leasing or else it wouldn't be anything to write home about

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