Morguard Real Estate Investment Trust (TSX:MRT.UN) Q3 2020 Earnings Call

0:00 Good afternoon, ladies and gentlemen, and welcome to the Moorgard Real Estate Investment Trust Third Quarter 2020 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, October 29, 2020. I would now like to turn the conference over to Mr. Ray Sahi.

0:25 Please go ahead. Thank you. Andrew, why don't you go ahead. Okay, thank you. So just as a point of introduction, my name is Andrew Tamlin, Chief Financial Officer of Moorgard REIT. I am joined this afternoon by John Guinness, Assistant Vice President of Retail Asset Management, Tom Johnson, Vice President of Western Asset Management, Tulio Kapule, Vice President of Eastern Asset Management, along with Ray Sahi, Chief Executive Officer 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 third quarter 2020 MD&A and financial statements, which have been posted to our website.

1:11 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. It's important to acknowledge the impact of COVID-19 and the resulting pandemic on the real estate industry, and in particular, the enclosed mall asset class. The tenant failures over the last six months have had a profound impact on both net operating income and the resulting valuations that are calculated from the cash flows on the enclosed mall portfolio. 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. At this point, the duration and the impact of COVID-19 outbreak is unknown.

2:00 It would appear that we're entering a second wave in central Canada, which is obviously disappointing. The Trust has seven enclosed malls across Canada. Six of these were impacted by non-essential business closures during the second quarter, resulting in periods where most tenants were not allowed to operate. The Moorgard Group decided to participate in the Secret Program, which was arranged by the federal government and Moorgard believes that supporting its small business tenants is an important initiative during these troubling times. The secret program is now complete. This program supported small business tenants for six months, April to September, and required landlords to write off 25% of a tenant's rent, required tenants to pay a maximum of 25%, with the government paying the other half.

2:56 There were 288 tenants across all asset classes that applied for this program. The vast majority of these tenants were in the retail asset class. The total six-month cost of the program was $2.8 million to the trust. All amounts that were receivable from the government under this program have now been collected. The secret program proved to be burdensome for landlords as the entire administrative aspect of this program was put in our hands. Now that the secret program is complete, there is now a new supplementary program being offered by the federal government to help with rent relief. The new program will be available until June 2021.

3:45 It will fund up to 65% of rent for businesses that have seen a revenue decline of at least 70%. Businesses that have had revenue fall by less than 70% will receive a gradually decreasing level of support in line with revenue. Businesses that are forced to temporarily shut down by mandatory orders will be able to qualify for funding that covers up to 90% of the rent. In addition, there is a new program offered by the Ontario government which is designed to help restaurants and other businesses impacted by health measures to help offset fixed costs like property taxes and utilities. Management is still looking for details about how this program will be rolled out to the stakeholders.

4:33 Collections to date across all asset classes during the second quarter was 76%. and have increased in the third quarter to be in the 85 to 90% range. Collections for October are expected to end the month at approximately 87%. Enclosed mall collection percentages have ranged from 53% in the second quarter to amounts in the range of 75 to 80% in the third quarter. The secret program and the sheer volume of deferral and abatement requests relating to receivables from the second quarter has resulted in an administrative backlog in addressing unpaid rent. Rent solutions with the trust tenants are being discussed and negotiated on a tenant-by-tenant basis.

5:22 Wherever possible, term extensions or other negotiated rights are being exchanged for abatements. In some cases, third quarter rent is not being paid by tenants in order to create leverage as part of these discussions. It is expected that these arrangements won't be fully documented and negotiated until the end of the year. At the end of the third quarter, there was approximately $23 million in rent arrears. This includes approximately $6 million in deferrals granted and approximately $2.5 million outstanding from failed tenants. Collections have been steady for both the trust's office portfolio, which is approximately one quarter of its revenue coming from government tenants, as well as the strip portfolio, which are largely grocery anchored.

6:14 Over the last six months, there have been a number of tenant failures, Le Chateau being the most recent example about a week ago. The trust has been able to keep occupancy for the majority of these locations. Out of a total of 59 locations where tenants have filed, the Trust has been able to keep approximately two-thirds of these locations occupied under restructured or percentage deals. The closures represent a total of approximately $45,000 in GLA. The Trust has recently concluded discussions with the Bay for its location at Cambridge Centre in relation to its upcoming renewal option as well. As an incentive to the Bay to exercise their option, the Trust allowed the Bay to enter into a structured or percentage deal at this location only.

7:04 The estimated annual impact of the fill tenants along with the concession granted to the Bay will total approximately $8 to $9 million annually as compared to results in 2019. Looking at traffic patterns, as we might expect, there is some regionality with our enclosed malls. This is related to the amount of infections that have been identified in the area that the mall operates. For example, traffic at our enclosed mall in Prince George, which has had relatively few infections, is at approximately 90% normal traffic levels, whereas traffic at our two enclosed malls in Ontario are more at the 50% to 70% levels. 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.

7:59 This allowance represents possible negative outcomes for the arrears down the road. Any amounts forgiven under the secret program have been processed as a bad debt and have been written off. The allowance for doubtful accounts of September 30th amounts to $6.8 million. This includes two buckets, the portion relating to failed tenants, which I've previously referenced to be $2.5 million, and an estimate of all other credit losses, which total $4.3 million. For the three months ending September 30, 2020, the Trust has reported $100 million in fair value losses to the portfolio. $85 million of that relates to the Trust in closed malls.

8:44 In general, cap rates were raised approximately 25 basis points in this quarter for the malls, along with further changes to cash flow assumptions. There's been a combined 50 basis point change to cap rates for the enclosed mall portfolio so far in 2020. Looking at results, overall, the third quarter of 2020 was the quarter with results that were impacted by COVID-19, as well as the recurring year-over-year impact of the obsidian rent relief. This has produced declines in both net operating income and FFO metrics on a year-over-year basis. Speaking of occupancy rates, they were down slightly at 92% as compared to 93% one year ago.

9:33 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 343,000 square feet in GLA coming up for renewal for the remainder of 2020. At this point, this is in the range of 85% that is either complete or almost complete. Management has also had ongoing discussions with the provincial government tenant at Petroleum Plaza, which comes up for renewal on December 31st, 2020. and we fully expect them to renew as well, although we don't expect them to finalize this renewal until the first quarter of 2021. Turning to financing and liquidity, the Trust has $127 million in liquidity at the end of the third quarter. This is up from $52 million at the end of 2019.

10:26 Helping to enhance the liquidity position over the last quarter was the closing of approximately $70 million in upfinancings along with the sale of a vacant parcel of land for proceeds of almost $7 million. There was a further up financing, which netted $7 million after the close of the quarter. These were all completed for an average interest rate in the range of 2.9 to 3%. Looking at capital, the trust is curtailing discretionary operating capital for 2020, and also to a certain degree in 2021 in order to ensure that capital is preserved. Other work was postponed due to shortages or logistical challenges resulting from the pandemic.

11:14 Consequently, it's expected that PCME or operating capital expenditures for 2020 will be less than normal, approximately one-half of normal amounts. The trust has now completed the first phase of the redevelopment of the former Sears premises at the Pine Center in Prince George, British Columbia. The new wing consists of approximately 76,000 square feet of redeveloped GOA and is anchored by a winner's home sense and was completed this summer. Approximately 65% of the space is filled. Other retailers that are now open include a BC Cannabis store. The finalization of some of the remnant space, which includes an additional retailer and some small bay CRU, is expected to take until 2022.

12:02 The development work on the center in Saskatoon has been continuing and is expected to be completed later this year. Wrapping up, while the economy and by extension some of the REITs assets are going through their challenges, we remain positive about a number of aspects of our business. Most of our enclosed malls remain dominant in their geographical area, and our strip malls, which are largely grocery anchored, have shown resilience in collections. 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 continuing to execute our strategy, and thank you for your continued support.

12:56 We'll now open the 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 touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please flip the handset before pressing any keys. Your first question comes from Natalie Zhang at BMO. Please go ahead. Hi, Andrew.

13:27 How are you?

13:30 I'm pretty good, thank you. How are you?

13:32 Not too bad. So I'm just dialing in in order to ask one question. What exactly, if you're able to disclose, is the Q320 total billing figure?

13:45 Sorry, what was that question?

13:48 For the total tenant billing, because you disclosed as a percentage basis, well, we're just trying to arrive at the amount of write-off.

13:59 Oh, I see. The total billings would be in the range of including taxes of around $70 million for the quarter? Okay. $65 to $70?

14:16 Okay. Okay. And my follow-on question is, maybe I'm just looking cross-eyed, but it did say that you took $2.8 million in terms of SECRA, and that's about 3%. Or is that in junction with write-off as well and the other VAT debt?

14:47 Sorry, can you just repeat that question? I didn't quite get that.

14:51 Right. Okay. So I'm just trying to figure out because of the table that you guys disclosed for rent collection, there is a 3% that is coming from, let me just scroll to it, 3% of the total billing that is contribution from secret write-off as well as bad debt expense. I'm just trying to arrive at the number because from my calculation, perhaps I'm having a little trouble. in order to get to that number, my number as a percentage is a lot higher, so.

15:20 Yeah, maybe it might make sense if I take down your contact information and I'll contact you after the call, just so that might be a little bit easier to go through rather than on the call.

15:33 Absolutely, 100% I'll reach out to you.

15:35 What's your, what's your, okay.

15:39 I work for Genema. All right, we'll do that. I'll get in touch. Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1 now. There are no further questions at this time. You may proceed.

15:59 Okay. Thank you, everybody, for joining the call, and stay safe. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.