Morguard Real Estate Investment Trust (TSX:MRT.UN) Q2 2020 Earnings Call

0:01 Good afternoon, ladies and gentlemen, and welcome to the Moorgard Reap second quarter 2020 results conference call. At this time, note that all lines have been placed in the listen-only mode. But following the presentation, we will conduct a question-and-answer session. And if at any time during this call you require immediate assistance, please press star zero for an operator. Also note that this call is recorded today, Thursday, July 30th, 2020. And I would like to turn the conference over to your host, Mr. Ray Sahi. Please go ahead, sir.

0:31 All right, thank you.

0:33 Thank you. Okay, you go ahead. Okay, thank you. Just as a point of introduction, my name is Andrew Tamlin, Chief Financial Officer of Moorgard REIT. I'm joined this afternoon by John Guinness, Assistant Vice President of Retail Asset Management, Tom Johnson, Vice President of Western Asset Management, Tulo Kapuli, Vice President of Eastern Asset Management, along with Ray Sahi, CEO and Chairman of the Board. Thank you all for taking the time to join the call. Before we jump into the call, I would like to point out that our comments will mostly refer to the Q2 2020 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 this call.

1:24 To start with, it is important to acknowledge the impact of COVID-19 and the resulting pandemic. We are continuing to take action to mitigate the effects of the pandemic on our business operations, while also focusing on the impact on our staff, tenants, and other stakeholders. Governments have reacted to the pandemic with interventions intended to stabilize economic conditions. The duration and the impact of the COVID-19 outbreak is unknown at this time, although there are definitely some encouraging signs within Canada, and particularly in the West. The trust diversification across the country and across the retail and office asset classes helps to lower the risk with the pandemic.

2:10 The pandemic has been most impactful to our retail assets, and in particular to our enclosed regional malls. Our strip malls, which are largely grocery anchored, have held up well over the last quarter. The Trust has seven enclosed malls across Canada. Six of these were impacted by non-essential business closures during the quarter, resulting in periods where certain tenants were not allowed to operate. The reopening of the various economies across Canada has been closely tied to whether the virus is considered to be under control. Non-essential business orders were listed to various degrees in the western provinces in May, and the traffic in those enclosed malls are reflective of these earlier dates, with traffic patterns ranging from 75% to 90% of normal in these malls.

3:03 Traffic patterns in Ontario malls are less, reflecting the lag in when the orders are listed here as compared to the western provinces. Collections across all asset classes during April, May and June have been approximately 70%. Collections for July are expected to end the month at approximately 75%. Retail collections have been improving month by month with collections at our western malls significantly surpassing the collections in Ontario malls. This is an encouraging sign as our rent collections are increasing with more tenants opening up and trapping getting back to approaching normal. Our office collections will be protected in the future due to the fact that approximately one quarter come from government tenants.

3:56 Moorgard has decided to participate in the Secret Program and believes that supporting its small business tenants is an important initiative during these troubling times. While somewhat complicated, the Secret Program provides rent relief to small business tenants across the country for April, May, June and July. There are certain qualification criteria for tenants, such as having a 70% decline in revenue for the quarter. This program establishes a mechanism whereby the federal and provincial governments cover one half of the rent for the tenants. One quarter of the rent is also forgiven by the landlord and the other quarter is paid by the tenant. Moorgard is currently working through these applications and will be filing in August on behalf of its tenants. There are approximately 300 tenants applying to the program for the REIT.

4:45 Management has estimated that the cost of this program will be $1.4 million for the quarter or $1.9 million in July. There's approximately $4 million in gross rent arrears outstanding in relation to this program for the quarter ending June 30, 2020. Moorgard is working through the administrative burden of this program, which has been placed on the landlord. Management is also working through rent payment solutions for rent arrears resulting from tenants that are not part of the CEQA program. This is being done on a tenant by tenant basis. Deferrals are being offered whereby tenants can demonstrate a material decline in business. Abatements are being considered when there is severe hardship on the part of the tenant and when there is an opportunity to exchange for improved lease terms.

5:36 Working through these rent payment solutions is a difficult, time-consuming process as every tenant has different considerations and circumstances. Further, most tenants did not want to engage in meaningful dialogue until they had some visibility to both the economic landscape and the secret program post-shutdown. Of the $24 million in Q2 rent arrears outstanding at June 30th, approximately 10% has been collected in July, and another 15% has been granted in deferrals. Turning to our bad debts, IFRS requires filers to set aside an allowance for doubtful accounts in regards to the expected lifetime credit loss of accounts receivable. This allowance effectively represents possible negative outcomes down the road for the Q2 arrears.

6:26 This allowance includes two buckets, the portion of small business rents forgiven under the secret program, which I previously referenced to be $1.4 million, and an estimate of all other credit losses on the remaining receivables, which total $4.1 million, for a grand total of $5.5 million for the quarter. There have been a number of failed tenants as a result of the current economic recession. Most of these tenants will remain open in our enclosed malls under restructured rents, while some will close. There are a total of 44 locations that management has identified and is currently working with, or have worked with, in order to determine if restructured rents can be arranged. It is estimated that the majority of these locations will remain open.

7:14 However, the future impact on revenue is estimated to be in the range of $3 to $3.5 million on an annual basis. For the six months ended June 30, 2020, the Trust has recorded $233 million in fair value losses to the portfolio. This includes $171 million in adjustments to the enclosed mall portfolio. In general, cap rates were raised approximately 25 basis points in the first quarter, along with significant changes to cash flow assumptions in the second quarter, such as rental growth, vacancies, and credit assumptions. More conservative cash flow assumptions across other asset classes have also been built into our modeling as appropriate.

8:05 Overall, the second quarter of 2020 was a quarter with results that were impacted by COVID-19 from the allowance of the arrears, as well as the impact of the obsidian rent relief. This has produced declines in both NOI and FFO metrics on a year-over-year basis. Combined Q2 2020 occupancy rates remain relatively unchanged year-over-year and since year-end at approximately 93%. And now for a quick update on leasing efforts. As of today, we've completed or expect to complete renewals on the vast majority of the 640,000 square foot retail leasing GLA coming up for renewal in the remainder of 2020. At this point, that is in the range of 90% that is either complete or almost complete.

8:55 Further, almost two thirds of the 113,000 in office GLA coming up for renewal has been completed. Management has had ongoing discussions with the provincial government tenant at Petroleum Plaza, which comes up for renewal on December 31, 2020, and we fully expect them to renew as well. Turning to financing and liquidity, the trust is $54 million in liquidity at the end of the second quarter. This is up from $52 million at the end of 2019. Helping to enhance the liquidity position over the next quarter are two things. the expected closing of approximately $75 million in up financing in the third quarter, along with the sale of a vacant parcel of land for proceeds of $6.8 million.

9:41 The combined impact of these transactions will be an increase to approximately $136 million in liquidity. The up financing available for the 77 Bloor Street property is significant and is a major component of the $75 million figure. The trust is curtailing discretionary operating capital spending for 2020, being mindful of COVID-19, and also to a certain degree in 2021, in order to ensure that the capital is preserved. Other work has also been postponed due to governmental orders. Consequently, it is expected that the PCME or operating capital expenditures for 2020 will be approximately one half of normal amounts for the rest of the year, including Q2.

10:30 The trust has made good progress with the redevelopment of the former Sears premises at Pine Center in Prince George, British Columbia. The new wing consists of approximately 76,000 square feet of redeveloped GLA and is anchored by a winner's home sense. Approximately 65% of the space is filled. Other retailers that are now open include a BC cannabis store. This wing all opened up in the second quarter of 2020. The finalization of some of the remnant space, which includes an additional retailer and some small bay CRU, is expected to take until 2021. The development work on the centre in Saskatoon has been continuing and is expected to be completed later this year.

11:18 Wrapping up, we are encouraged by some of the signs that things are returning to normal. In Ontario, most businesses are reopening every day, Whereas out west, businesses have been operating for a while now. While the economy and by extension some of the REITs assets are going through the challenges, we remain positive about a number of aspects of our business. Most of our enclosed malls remain dominant in their geographical area. This fact will still remain once a new normal is achieved. Beyond retail, we have high quality office buildings in Canada's largest markets. We continue to be positive about our business and the objective of building value for our unit holders. We look forward to continuing TechSecure at our strategy and thank you for your continued support. We'll now open the floor to questions.

12:10 Thank you. Ladies and gentlemen, if you do have a question at this time, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. And should you wish to withdraw your question, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift a handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Brandon Rudinsky at Royal Star. Please go ahead.

12:46 How are you doing? I just had a question specifically for what you think the commercial real estate trends are going to be moving over the next decade. What do you think about the retailers that are currently going bankrupt or some of the retailers that aren't going to come back? Something that's been very common in the news is David C. obviously closing all of its locations in the United States, hundreds in Canada. What do you think was going to be the next decade trend in terms of how that space is going to be used? Any adaptations? Just wanted to get your thoughts on the next decade, developments, growth, et cetera.

13:26 John, do you want to? Yeah, I want to take my time. Okay, great. It's hard to answer it specifically because if we all knew the future, we wouldn't be here. Retail is an evolving landscape. To your point, A lot of retailers are going through a major restructuring, CCAAs, liquidations, reducing their store counts, et cetera. But as Andrew noted during his remarks, you know, we are working with our retailer base, and, you know, for the most part, we're doing a good job in terms of retaining some of these stores. Where we get back units, really can't answer the question insofar as, you know, What we do, clearly, it was built for retail use, and that's what we're targeting.

14:12 We're out there busybodies trying to scrounge up new business on these malls, and that will continue to be the focus. Will the uses evolve over time? New retailers emerge? Absolutely. But it's impossible for me to tell you exactly what it's going to be 10 years from now.

14:28 For sure. Yeah, for sure. Totally understood. Just wanted to get your guys' – if you guys had any new innovations coming out or You know new technologies like let's say pickup services or maybe apps that you guys were developing that you want to offer support to your current tenants and that sort of thing We're always innovating from an operating standpoint, so you know we're not we're not remaining behind the curve in that regard So it's just a work in progress Okay, sure. And from the retail side, other than that on the industrial side, have you seen an increased demand there considering the rise of e-commerce?

15:14 Well, this is a great question. First of all, we don't have that big a portfolio of industrial at this stage. It's pretty well fully leased, so we don't really see anything that is happening on the industrial side.

15:31 Okay, sure. I guess that pretty much covers all my questions. Thank you. Thank you. Thank you. Ladies and gentlemen, as a reminder, if you do have a question at this time, please press star followed by one on your touch-tone phone. And at this time, it seems like – oh, I'm sorry. We do have a next question from Peter Leacock at CIBC with Gundy. Please go ahead.

15:59 Hi, good afternoon. I'm just wondering how you feel about the distribution at this time?

16:10 What do you mean, how we feel about distribution?

16:13 Is it, do you feel it's sustainable at the level that it's at? I guess that's what I'm after, please.

16:20 Well, you know, this is not an easy question to answer, depending on what continues to happen. You know, we did cut the distribution some time ago, and we just continue to review it. And at this stage, we don't really have a clear view of the distribution levels.

16:48 Okay? Okay. Thank you. Thank you. Once again, ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. And at this time, we have no further questions. Please proceed.

17:08 Well, thank you very much for attending this, and hopefully we'll speak to you next quarter. Thank you. Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your line.