Morguard Real Estate Investment Trust (TSX:MRT.UN) Q1 2023 Earnings Call

0:00 To start the playback, press 1. For playback instructions, press Recorded on the 27th of April, 2023. The length of the recording is 20 minutes, 58 seconds. Good afternoon, ladies and gentlemen, and welcome to the Moorgard Real Estate Investment Trust first quarter conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press door zero for the operator. This call is being recorded on Thursday, April 27, 2023. And I would now like to turn the conference over to Mr.

0:47 Andrew Tamlin. Please go ahead.

0:50 Good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morgard REITs. Welcome to Moorgard REIT's first quarter 2023 earnings conference call. I am joined this afternoon by John Guinness, Assistant Vice President of Retail Asset Management, Tom Johnson, Senior VP of Western Asset Management, Todd Febo, VP of Eastern Asset Management, along with Ray Saeed, CEO and Chairman of the Board. Thank you all for taking the time to join the call. Before we jump into the call, I'd like to point out that our comments will mostly refer to the first quarter 2023 MD&A and financial statements which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on the call.

1:43 Overall, we are again pleased with the first quarter results, which showed continued improvement in the same asset metrics on a year-over-year basis. Net operating income for the quarter increased 11% to $31.5 million in 2023 due to a one-time property tax refund for one of the trusts and closed regional centers in the amount of $2.8 million, which related to vacant space and past failed tenants such as Target. FFO for the quarter also increased 9% to $16.3 million in 2023 compared to a year ago. Same asset net operating income for the first quarter, excluding the property tax refund, improved 1.3% from a year ago, buoyed by a 9% increase in same asset results for our enclosed mall portfolio.

2:36 This represents the eighth quarter in a row where we have achieved improved same asset results on a year-over-year basis. Interest expense has increased 13% to $14.7 million for the quarter on a year-over-year basis. The impact of lower debt in the amount of $23 million on a year-over-year basis has been offset by higher short-term borrowing costs due to the higher interest rate environment that we find ourselves in. Higher interest rate costs on renewal costs of mortgages has also been a factor. Consistent with year-end, the Trust has approximately 18% of its debt as variable, and the Trust will continue to monitor this and would expect to see it somewhat elevated in the near future as well.

3:24 As mentioned previously, our enclosed model results continue to rebound from the downturn we saw under COVID. During the quarter, we had a $21 million fair value loss on our real estate properties, which was almost all attributable to more conservative leasing assumptions on our office portfolio. This compares to a $25 million fair value gain recorded a year ago. The reached PCME or operating and leasing capital reserve was established to be $25 million for the year. While we only spent $3.6 million of the $6.3 million reserve this quarter, we are expecting elevated capital needs in future quarters into 2024 above the reserve amounts.

4:10 This is due to both contractor delays from last year, some catch-up in spending, as well as some elevated leasing capital for upcoming reveals. Our overall occupancy levels of 90% at March 31st is down slightly from a year ago. This compares to the percentage at the start of the pandemic, which was 93%. We are seeing continued softness in the office leasing market. However, there are pockets of activity, including in Calgary and certain suburban office assets. This speaks to the fact that in most cases, we've been able to keep tenancy at our quality assets. I also note that we have a single tenant industrial asset for which the tenant did not renew in the fourth quarter. We are working to find a new tenant for this asset.

5:01 And now for an update on our leasing efforts. In 2023, there's approximately 372,000 square feet in retail GLA coming due. We do expect that every retail tenant larger than 5,000 square feet to renew their space. There's also approximately 329,000 square feet in office space coming due in 2023, and we feel good about the vast majority of this space as well. I do note that there is 13,000 square feet in Ottawa that will be vacated and a further 19,000 square feet at 77 Bloor that was vacated in this past quarter. We see no issue with the 40,000 square feet of industrial space renewing in 2023, which should be done with a good uplift in rates.

5:52 Leasing discussions for retail opportunities have definitely picked up in the last year, as both current and prospective tenants now have a better handle on what we expect going forward. This has led to numerous conversations about various opportunities at our properties across the country. Office leasing discussions, on the other hand, while gaining some momentum, are still muted, as tenants are still trying to figure out what their office needs are over a long-term basis in a post-COVID world. Management has had continued ongoing discussions with provincial government tenants at Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020, and is now in overhaul. While they have verbally told us that they expect us to renew, they have unfortunately still been focused on their response to the pandemic and other initiatives which have taken priority.

6:46 Our experience is similar to other Alberta landlords who have the provincial government as tenants. I do note that this space has remained occupied over this entire time frame. Turning to financing and liquidity, the Trust has $120 million in liquidity at the end of the first quarter and $316 million in unencumbered assets. These numbers are very comparable from year end. Looking specifically at mortgage renewals, we had four mortgage renewals or financing so far this year with approximately $6 million in up financing proceeds. The trust does have elevated mortgage renewals over the rest of 2023 and 2024, and we do expect that there will be limited opportunities of up financings available during this time.

7:39 We are especially pleased with the results from Pine Center in Prince George, British Columbia. This mall will have a new Save-On Foods grocery store opening shortly, which has also led to leasing opportunities with discriminating tenants such as Lululemon and Sephora, along with others. While the construction efforts with Save-On Foods have seen delays, which is not uncommon these days, the marketplace is excited about all of these new tenants. We expect to be able to turn the Save-On Foods space over to the tenant in the second quarter. The addition of grocery further complements the strong anchor tenant profile in this mall. Last quarter, the trust announced that it reached an agreement with Team Town to convert the empty home outfitter space at Heritage Town Center in Calgary into a 34,000 square foot retail store focusing on sporting goods.

8:33 The project cost approximately $3 million from a landlord perspective and was completed in the first quarter of 2023. This space is now open. The trust has also announced a refresh of the lobby and frontage of Rice Howard Place, located in Edmonton, which will cost approximately $5 million. The trust owns 20% of this asset. Wrapping up, we are pleased at the resiliency of our assets and the improved results and activity levels from our enclosed mall and retail segment. While there still is room to grow to get back to pre-COVID results, we have seen positive results in the last year. We are looking forward to continued positive leasing conversations for our assets.

9:20 Most of our enclosed malls remain dominant in their geographical area, and our strip malls, which are largely grocery-anchored, have performed well in this pandemic. Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unit holders. We look forward to continued executor strategy and thank you for your continued support. We will now open floor to questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchstone phone. You will hear a three-tone prompt acknowledging your request.

10:09 Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Jonathan Kelcher from TD Cowan.

10:32 Please go ahead. Thanks. Good afternoon. First question, just on the office leasing side, you said you feel good about the remaining maturities this year. I guess other than the $13,000 in Ottawa, is there anything larger that you know that will not be renewing?

10:55 No, no. That was really everything that I wanted to highlight from that perspective, Jonathan.

11:02 Okay. And then what would your expectations be on renewal rates? What do you think the mark-to-market is in your office portfolio for what's maturing this year?

11:15 Todd, do you want to maybe cover that?

11:19 Sure. So the rates have been holding steady. The difference is that the cost to do those rates is where we're having to often give more in TIs to compensate to keep the rates up. So we're holding strong with our rates. So they're going to keep as close to that as possible, but the inducements tend to have creeped up as the market has softened.

11:41 Okay, that was kind of my next question. What are you seeing in terms of increases in TIs? And is it different from market to market?

11:52 It is. There has been certainly a creeping up, but it is kind of all over the board still. Unfortunately, it's tough to narrow down to a specific trend other than it's higher than what it was previously. There's really no specific number that I can give it to you that can say that this represents the market, but I can say that it's consistently higher. That's unfortunately the best I can narrow it down because that is really truly what we're seeing across the spectrum of the markets right now, at least in the east, and we can talk about whether the west is any different, but the east, where I look after, it has been a varied response to that over the three that I look after.

12:35 Yeah, I think it kind of varies depending on the market and the tenant and the situation, right, as far as trying to, quote, balance, Jonathan.

12:44 Okay, fair enough. Higher and net effectives will be obviously down a little bit, but you're holding face? Correct. Okay, that is it for me. I'll turn it back. Thanks.

12:59 Thank you, Jonathan. Thank you. Once again, please press store one should you wish to ask a question. The next one is from Tom Callahan from RBC Capital Markets. Please ask your question. Hello, Mr. Tom Callahan.

13:29 Hey, sorry, I think I was on mute. Good afternoon, guys. Just first one from me was just on the retail side of the portfolio. Just wondering, in terms of the sequential drop in occupancy, was that something specific like a lumpier tenant or just kind of a collection of smaller leases?

13:50 Yeah, there was no specific tenant, Tom. It was really, I mean, you could kind of chalk it up to the, there's always a bit of a decrease from Christmas as well, so. Just a lot of small little things.

14:04 Got it. And then maybe just building on that and some of your earlier comments and prepared remarks, where do you guys kind of see portfolio occupancy trending here over the next kind of two, three quarters?

14:17 Do you want to make a comment on that, John, from a retail perspective?

14:22 Sure, Andrew. Thanks very much. I appreciate the question. So retail in general, if you compare over the course of the last, you know, two years, we've actually held pretty steady in terms of overall occupancy. And clearly we went through difficult times in the summer and later, latter part of 2020, but we've been pretty good in terms of retaining portfolio occupancy across the board, whether it's in closed malls or strip centers. So as Andrew noted, we usually see a take up in Q4 to represent some temporary inline leasing we do in our enclosed malls in anticipation of the Christmas season. But all in all, you know, we've seen, increased demand, which is good. Our strip portfolio has been pretty consistent as it relates to its occupancy.

15:09 But the demand, and it varies across the country, more so in the West than here in the East. But I would argue that portfolio occupancy from the retail perspective should remain at or grow incrementally over the course of the calendar year.

15:25 Got it. Thanks. Thanks. That's helpful. And maybe just one more, one last one from me on the credit side. But You guys provide some disclosure around the splits with respect to mortgage financings, the split between banks, pensions, and insurance companies. Just curious, have you guys seen any change in lending appetite or perhaps bifurcation amongst those groups, say, over the past six months?

15:49 No, not really. We do try to have a good variety there, Tom. I would continue to say that we'll strive to have that variety as well, just to mix things up. But I would say no real change of note.

16:09 Okay, got it, got it. And just on kind of remaining refinancings this year, I think you had mentioned last call kind of 50 to 60-ish percent on LTVs. I assume that's kind of still the target for the remainder?

16:23 Yes, it is, yeah.

16:24 Got it. Okay, thanks. That's great, guys. I'll turn it back.

16:27 Okay, thank you, Tom. Thank you. Your next question is from Dr. Chow Ed, a private investor. Please ask your question.

16:38 Hi, good day, and thanks for taking my call. I'm a new investor on this week, and I have some questions. Could you please let me know what's your current net asset value and your payout ratio, please?

16:59 Sorry, you're not coming through all that well.

17:04 Okay. Can you hear me clearly now? So I said I'm a new investor in this switch and I'm trying to understand what is your current net asset value and your payout ratio, please.

17:19 Maybe you could reach out to me and I could clear some of these questions after the fact, if that's okay. Okay.

17:26 Okay, I said I'm a new investor in this suite, and I want to know what is your current net asset value and your payout ratio, please?

17:37 Well, the payout ratio is 37.5%.

17:39 37.5%, and what's your net asset value, please?

17:46 The net asset value is in the range of $15 to $16. Okay.

17:53 Okay, so if you have a net asset value in the range of $15 to $16, and your stock price has been decimated over the years, how do you guys feel about this for your long-term investors? When you have a house, you own a property that is worth $15 to $16 a share, and it is selling at less than $6 consistently. How do you guys feel about this?

18:30 Well, obviously, there's been a real estate downturn. I'm not entirely sure what you're wanting us to convey. We've just gone through COVID. There's macroeconomic factors. The next one is from Tenzing Lama, a shareholder. Please ask your question.

18:56 Hi there. Thanks for taking my question. I was just wondering sort of, you know, if you could comment generally about your priorities for the excess capital that you have within the REIT. The distribution is sub-15% of your adjusted flow from operations. You know, I'm just thinking in terms of sort of cost of financing is generally going inching up. I don't know what the weighted average interest rate is currently, probably 5% maybe getting close to that and moving up. So I was just curious how the management team thinks about, you know, between deleveraging or investing or, I don't know, unit buybacks. What are your priorities for whatever excess funds you have within the REIT?

19:42 Thank you.

19:44 Yeah, thanks for your question. We are focused on our debt right now, so I don't see us focusing too much on buybacks. You know, we've talked about elevated amount of maturities and debt we can do over the next year or so. So we will be focused on that rather than, you know, focusing on issue of bid purchases There is a modest amount of development capital that we're looking at as well, but nothing that's going to be too high.

20:24 Okay, thank you. So just to clarify, in terms, you're not sort of planning to redeploy it into additional acquisitions or more properties. It's just getting your leverage down. Is that right?

20:36 Yeah, we haven't been too active on acquisitions in the last few years, so I don't really see us moving ahead with any acquisitions in the near term. Okay, thank you. Anything else? Nope, thank you. No further questions at this time, sir. Please proceed.

20:58 Okay, thank you. Thanks, everybody, for joining the Q1 call, and we'll look forward to talking to everybody next quarter. Thank you. Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for participating. You may all disconnect.

21:16 Goodbye.