Morguard Real Estate Investment Trust (TSX:MRT.UN) Q3 2024 Earnings Call

0:00 Good afternoon, ladies and gentlemen, and welcome to the Moorgard Real Estate Investment Trust 2024 Third Quarter Results Conference Call. At this time, all lines are illicit on email. Following the presentation, we will conduct a question and answer session. If at any time during this call, you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, October 31, 2024. I would now like to turn the conference over to Andrew Tamlin, CFO. Please go ahead.

0:31 Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Moorgard REIT. Welcome to the Moorgard REIT's third quarter 2024 earnings conference call. I am joined this afternoon by John Guinness, Assistant Vice President of Retail Asset Management, Tom Johnson, Senior Vice President of Western Asset Management, and Todd Bebo, Vice President of Eastern Office Management. 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 third quarter 2024 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.

1:21 Overall, we are again pleased with the third quarter results, which saw strong increases in same-store net operating income growth across all asset classes, which is consistent with the levels of leasing momentum we have been seeing. Net operating income for the quarter was up almost 6% at $32.2 million, as compared to $30.6 million in 2023, due primarily to improved results at the REITs and closed malls. Same asset net operating income for the third quarter increased almost 8% due to increases in all three asset classes, but again with a focus on improved results for the malls. Same asset net operating income for the year-to-date nine-month period was up 5.6%.

2:08 Retail results continue to grow as both traffic and sales in our enclosed malls improve as we move past the pandemic. Strong demand for retail space is also evident in the improved retail leasing spreads that we are seeing on renewals. Office results for the nine-month period saw a healthy 4% increase in same-asset net operating income due to increased leasing activity in the Trust's Alberta assets. We are pleased to see an average increase of 8% across all asset classes and leasing spreads on renewals for the nine-month period. which has helped to drive the same store growth. Interest expense increased 5% for the quarter to 16.8 million on a year over year basis.

2:58 Higher interest costs on rollovers of mortgages in the last year have been the primary reason why this has increased. The trust is approximately 15% of its debt. It's variable at September 30th, 2024. which has declined from 20% at the end of Q2. The trust continues to focus on paying down its debt, which is now $123 million less than four years ago at this time. FFO for the quarter increased 7% to $14.9 million in 2024, as compared to $14 million a year ago due to the improved results. As mentioned, our enclosed malls continue to perform and do well.

3:44 We are seeing increases in sales per square foot on a year-over-year basis, in addition to the increases in leasing spreads as previously mentioned. This has led to positive results at our enclosed malls and a continued positive trajectory of a bounce back of the performance of these outlets. During the quarter, we had minimal change in the fair value of our real estate properties as cap rate seems to stabilize, particularly for office assets. The REITs UCME are operating and leasing capital reserve was established to be 25 million for the year or 18.8 million for the nine months. Actual spending was 25.3 million. We are expecting elevated capital needs above the reserve amounts as we move further into 2024 and into 2025 due to increased leasing capital needed particularly for office deals and in general higher costs to move ahead and complete all capital projects.

4:46 Our overall occupancy level of 90.7% at September 30, 2024 is 60 basis points higher than a year ago. This increase is being driven by a 100 basis point increase in occupancy for our office assets. This increase in office occupancy is driven by increased leasing activity at our Alberta assets, in particular our suburban Calgary assets. And now for an update on our leasing efforts. In 2024, there is only approximately 100,000 square feet coming due for the fourth quarter. While we feel good about the majority of this space, I do note that there are two tenants in the range of 5 to 10,000 square feet range that will likely be vacating.

5:35 We do expect that virtually every other tenant to renew their space and remain positive about the remaining leasing activity necessary for this timeframe. Looking ahead to 2025, I note that we have approximately 500,000 square feet in space at Tinnitus Plaza coming due next year. As we have previously mentioned, we are actively working with these tenants to determine their needs beyond this date. Presently, we have renewal commitments for approximately 75% of the building and are having good conversations with certain other tenants. This will become a multi-tenant building at that point. We do expect a decrease in net operating income of approximately $13 to $15 million in 2025 due to the lease up and vacancy costs as the rents in this building get reset to market rates.

6:27 However, we do expect an approximately $5 million improvement in 2026 and beyond as we move past this initial lease up period. Beyond the PennWest Plaza space, we feel good about every other 10,000-square-foot tenant coming up for renewal next year. Moving on to retail, we will be embarking on a strategic merchandising program for St. Laurent, which will see the addition of two new nationally recognized brand names being added to the tenant roster, along with expansion plans for other tenants on the existing tenant wall. The budgeted capital commitment is $6.4 million and has been scaled back as compared to what had been previously announced.

7:13 We are anticipating some future phasing beyond this spend as we look to ensure a stable, sustainable, and traffic generating mix of tenants to this asset. Management has had continued ongoing discussions with the provincial government tenant, the Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020, and is still in overhaul. While we recently have had some better back and forth discussions, this is still going slowly, and at this point, there is still no resolution to report. Turning to financing and liquidity, the trust is $92 million in liquidity at the end of the third quarter, which is down from $98 million at the end of the second quarter, and $101 million at the end of 2023.

8:03 Earlier this year, the trust executed on the sale of Heritage Town Center, which netted the trust $20 million in net proceeds after the settlement of debt. These proceeds went to pay down imbalances on the line of credit. From a financing perspective, the trust was able to renew its Pine Center mortgage, bringing in $10 million of up-financing proceeds in the second quarter. This was then converted from a variable rate mortgage to a fixed rate mortgage, making 5.82%. The fixing of this rate happened in the first week of July and was done via an interest rate swap. In the third quarter, there was a $5 million pay down on another mortgage as we renewed it. Looking at the rest of 2024 and into 2025, there will be minimal opportunities to procure up-financing for any upcoming mortgage renewals.

8:58 Wrapping up, we are pleased at the resiliency of our assets and the improved occupancy and correlated results for all of our asset classes. We are especially pleased with the positive staying massive results we have seen so far this year. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area, and our strip malls, which are largely grocery anchored, have performed steadily. 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.

9:47 We will 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 star followed by the number 1 on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star 2. If you are using a speakerphone, please lift the headset before pressing any keys. Your first question comes from the line of Jonathan Kelcher from TD Cowen, room 10 is now open.

10:19 Thanks, Joe. Good afternoon. First question, Andy, just on the balance sheet, unless you have $140 million or so to turn and before that was under 70% more than the value. Are you guys going to have to do anything on that?

10:41 You're coming through a bit choppy. You're talking about the mortgages coming up for renewal in the fourth quarter, Jonathan? Yes. OK, yeah, we do expect to have a pay down as we move forward into the renewal of those mortgages. We're ballparking that at around $10,000,000. And as you noted, the the loan to value there is is is not great.

11:12 OK, so then OK. And then just on the operations side, you talked about, what sort of spreads are you getting in Coles Mall leasing?

11:28 Do you mind just commenting on what you're seeing for leasing renewals, John?

11:35 Sure. Hey, John. John Guinness here to answer your question. So as Andrew said, as an introductory comment, the Coles Malls have performed well over the course of the last two and a half years, coming really out of the spring of 2022. So leasing spreads over that time period have been really good, really due to the fact that pent-up demand has been strong because it's so expensive to build. So inventory levels have been grown across the board. So retailers have been defaulting to look at the existing stock of real estate, and enclosed malls have been the beneficiary of a lot of that. So spreads have actually been really good over the course of the last two and a half years.

12:15 Okay, can you maybe quantify that a little bit, you know, 15%, 10%, 20%?

12:26 In the malls, you're probably looking at leasing spreads this year, probably closer to 5% over contract on

12:39 renewal. Okay. And then I guess more generally, so the portfolio, It sounds like you don't have a lot that you're too, too worried about. What sort of stress do you think you're going to get without the board and both you and Office?

13:03 John already commented on retail. I mean, Office is still a pretty tough environment. Todd, do you maybe just want to comment on what you're seeing for leasing renewals on office?

13:16 Sure, I do. Thanks. John, so the office market right now, as Andrew identified, it's in a bit of a tough period where renewals are really in a position where we have to really work hard to get renewals to go through. We're competing with new tenancies and opportunities where they're giving tentative improvements and allowances that are very aggressive. So our rates, we try to hold our rates as well as possible, but we do have to induce those renewals fairly often. So we try to hold value as much as possible, but it's a pretty competitive environment right now, and it's pretty tough.

13:56 Okay. Can I cover things up for you, Jonathan? Yep. That was great. I'll put it back there. Okay. Thank you. As a reminder, if you wish to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time. I will now turn the call back to Andrew Tamlin. Please continue.

14:19 Thank you, and thanks, everybody, for joining. I look forward to next quarter's call, and have a happy Halloween. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.