Morguard Real Estate Investment Trust (TSX:MRT.UN) Q4 2024 Earnings Call

0:00 Hi, good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Moorgard REIT. Welcome to the Moorgard REIT's fourth 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 Febo, Vice President of Eastern Office Management. Thank you all for taking the time to join the call. Before we get into the call, I would like to point out that our comments will mostly refer to the fourth quarter 2024 MDNA and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MDNA, which would also apply to any comments that we make on this call.

0:50 Overall, we are again pleased with the fourth quarter results, which saw strong increases in same-store net operating growth. across all asset classes, which is consistent with the levels of leasing momentum we have been seeing. Net operating income for the standalone fourth quarter increased slightly over 2023. This included a 2.7% increase in same asset net operating income offset by a decline due to the sale of Heritage Town Center earlier in 2024. Net operating income for the year ended December 31st, 2024 increased 2% over 2023, which also included a 5% increase in same asset net operating income across all asset classes.

1:36 Same asset net operating income for enclosed malls was up a healthy 6.8% on a year-over-year basis. This marks the third year in a row that the trust has had positive same asset net operating growth incorporating all asset classes. an indicator of the strong leasing market in the post-COVID environment. Retail results continue to be strong and include an approximate 5% increase on leasing rates from renewals, in addition to strong metrics from sales and traffic. We have had some instances of failed tenants for both the Comark Group, which includes brands like Rickey's and Bootlegger, along with one outlet for Peavey in Yadrie, Alberta. However, we do not expect this to be material.

2:22 We are also working with a new operator to mitigate any downturn with the Comarch failure, and I also note that the PV space has generated good interest from other prospective tenants already. We are pleased to see an increase in 3% in same asset net operating income for our office asset class for the year ending December 31, 2024. This is mainly driven by increased leasing activity in Alberta and especially at Penn West Plaza. Interest expense increased 7% for the year to $67.4 million as compared to 2023. Higher interest costs attributable to the rollovers of mortgages in the last year have been the primary reason for this increase.

3:08 The trust has approximately 15% of its debt as variable at December 31, 2024, which has declined from 20% at the middle of the year. The trust continues to focus on paying down its debt, which is now $120 million less than four years ago at this time. Interest expense for the quarter was actually down 4.4% compared to 2023 due to the lower debt and the slightly lower short-term interest rates. FFO for the quarter increased 5% to $16.5 million in 2024 as compared to $15.7 million a year ago due to the lower interest expense. Looking at our accounting for real estate properties during the quarter, we had $49 million in fair value losses due primarily to increases in cap rates in certain markets for our office asset class.

4:05 The REIT's PCME, or operating and leasing capital reserve, was established to be $25 million for the year. Actual spending was $38.2 million. The increased capital spending over the last couple years is due to higher material costs, higher inducement costs, and elevated repair costs in general. We continue to expect capital spend to be in this range going forward, and hence have concluded it is appropriate to increase the reserve to 35 million starting in 2025. Our overall occupancy level of 91.2% at December 31st, 2024 has increased by 90 basis points over the last year.

4:50 The increase is driven by increases in all asset classes, but especially 160 basis point increase in office tenancy over the last year. again driven mainly by our Alberta assets. And now for an update on our leasing efforts. Continuing with past momentum, in 2025, we are expecting every expiring retail tenant more than 10,000 square feet to renew. In regards to office, outside the Penmas Plaza tenancies, we have one Ontario office tenant who will be downsizing their 75,000 square feet to 50,000 square feet. We feel good about all the other office renewals on the books for 2025.

5:36 We also feel positive about the 48,000 square feet industrial space coming due in 2025 as well. Looking ahead to 2025, I have previously noted that we have approximately 500,000 square feet in space at Penrith Plaza, which came due at the end of January 2025. As we have also mentioned, we were actively working with the sub-tenants to determine their needs beyond this date. As of today, we have renewal commitments for approximately 79% of the building, which we are pleased with. This has now turned into a multi-tenant building. We do expect a decrease in net operating income of approximately $15 million in 2025 due to the lease-up and vacancy costs as the rents in this building get reset to market rates.

6:29 We are also 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 rent roll. The current budgeted capital commitment is $6.4 million and includes tenants such as Sephora and H&M. 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 continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020 and is still in overhaul. While we have recently had some better back and forth discussions, this is still going slowly And at this point, there is still no resolution to report.

7:26 Turning to financing and liquidity, the trust is $81 million in liquidity at the end of the year, which is down from $100 million at the end of 2023. Continuing from a financing perspective, the trust was able to renew its Penmas Plaza mortgage in the quarter for another two-year term, which will now be expiring in October 2026. This was coupled with a $7 million pay down and it remains a variable rate mortgage. Wrapping up, we are pleased at the resiliency of our assets and the improved occupancy and correlated results from all of our asset classes. We are especially pleased with the positive same asset results we have seen these past few years. We are looking forward to continued positive leasing discussions for all of our assets. Most of our unclosed malls remain dominant in their geographical area, and our strip malls, which are largely grocery-anchored, have performed steady.

8:27 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. 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 one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two.

9:12 If you're 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 of TD Cowan. Your line is already open.

9:34 Thanks. Good afternoon. Can I just start with the PV and the core mark question? bankruptcies or vacancies that you're getting. I think I missed how material those are. They don't show up in your top 20 retail tenants. Do you want to take that, John?

9:58 Sure. In terms of GLA exposure, Jonathan, is that your question?

10:01 Sure. The GLA or percentage of total retail revenue.

10:05 Yeah. So PV Mart is, as Andrew noted in his introductory remarks, is a 40,000 square foot box in Airdrie, Alberta. The Comart group of companies, primarily Rickey's and Bootlegger, for the REIT specific, I think aggregate to roughly 80,000 square feet across multiple assets. So that is the REIT's exposure. Now, As part of the CCAA process, I'm not sure how aware you are or anyone on the call is aware, but there is potential sale of some of the banners or select leases currently under discussion to be acquired. I don't want to give specific seconds because the deal is enclosed, but we're hoping we're part of that tranche that allows for some of these leases to be transferred to the new buyer so that it mitigates its exposure with respect to that GLA coming back.

11:00 Okay, that's sort of goes opposite to my next question. I was just going to ask like, they are obviously a, obviously we're a weaker retailer is now gone. Um, are, are your, is it, is the retail market strong enough now that you would sort of look forward to getting spaces like that back to, to kind of be able to push rents with better, better quality tenants?

11:24 Right. So let me start with the PV space. So, um, That space is, and again, going back to Andrew's comments, is receiving a tremendous amount of demand. And one thing that's really permeated through the retail market, particularly over the course of the last 12 months, but even expanding beyond that as we've transitioned out of the COVID or the pandemic, is It's just too expensive to build standalone boxes, and retailers are looking to expand, but they simply cannot make the economics work with respect to prototypical builds. That has actually helped us, not only on open format centers, but also in the closed mall environment. Now, to your question with respect to them being a weak retailer, yes, absolutely. There are select tenants like this one here where they, back in 2020, they restructured via CCAA, and now 2025 has hit and they're restructuring again.

12:16 So as an intermediate step, again, going back to my comments I just made moments ago with respect to looking to maybe cultivate a transaction where some of these leases are assigned to a new buyer, I think our position on this is to ensure that notwithstanding that they keep the occupancy of the space so that we have an income generating tenant, we're going to be very clear on controlling the space so we can start marketing to higher and better users. that is one of the conditions that we'll look to as part of to facilitate a trade of these leases going to a new buyer. So yes, we are actively thinking about that to rolling up the tenant roster, but it's not going to happen overnight, Jonathan. We need time to kind of filter it through because every property is different, right?

12:57 Yeah, for sure. For sure. That's helpful. And then just switching gears to the Penn West. And Andrew, I know you've we've known this one's been coming for a bit, but, uh, you said 15 million lost NOI this year. Um, but I think previous in previous commentary, you guys talk about getting about 5 million back starting in 2026. Is that still something, um, that we should, we should expect?

13:28 Yeah, I think I quoted a four to $6 million range, uh, in the past. So, yeah, I mean, that's still happening. Um, We're still trying to narrow that down a little bit, so I wasn't as forthright as that, but there will be an uptick in 2026.

13:46 And is that going to come from leasing the other 20-odd percent, or how should we think about that?

13:59 There was just a lot of inducements that we had to give that uh, take hits in 2025, like free rent and things like that. So, um, it's really, it's, it's really a function of that, Jonathan.

14:13 Okay. So, so leasing, leasing at that, uh, at that property would be additive then? Uh, yes. Okay. And then just lastly, it's just looking at your, the office portfolio and the Ontario vacancy around 25% kind of stands out, even though it hasn't improved year over year. Does that, um, can you just remind me if that pertains to one or two properties and that's something you expect to, you can improve over the next couple of years?

14:51 So it's mainly in Toronto and Ottawa, Jonathan. Um, Do you want to share your thoughts on those marketplaces, Todd?

15:02 Sure. Hi, Jonathan. Yeah, so Toronto market, as you may or may not be aware of, is kind of in a bit of a slowdown at the moment. It's one of the tougher sectors in the recent past. But there is some optimism that the year in front of us is much better than the year behind. So we're optimistic that things will improve over 25, but probably not until the latter part of the year. Certainly that's the case we're expecting for Toronto. Ottawa, it's a little bit more contingent on what's happening with the feds, but there's still optimism and that's going to have the same effect there as well.

15:39 Okay. I will turn it back. Thanks.

15:43 Thanks, Jonathan. Your next question comes from Roger Lafontein of Nugget Capital Markets. Your line is already open.

15:56 Hello, thanks for taking my call. I had a question on the Burquitlam Plaza status and if you would be able to provide any updates on that project. It seems to have gone a bit cold since 2023 and we're just looking to see if anything was moving with the city of Coquitlam. Thank you.

16:15 Yeah, John will take that.

16:19 Hi, Roger. So we are still... immersed in the entitlement process trying to get the rezoning completed for the property. It's a little bit more complicated there because it requires four readings for rezoning to be effectuated. Our hope is that at some point during calendar 2025, we get to council for first reading to start the rezoning process.

16:46 There's also a few stakeholders at that site as well, and it's just taking a bit of time to... stick handle through those stakeholders and i don't i don't think what we're finding at that site is much different from other other property owners it's just it takes time these days to get through the entitlement process unfortunately thank you for answering that that was Anything else, Alan?

17:34 Ladies and gentlemen, as a reminder, if you have a question, please press star 1. There are no further questions at this time. I would hand over the call to Andrew Tamlin for closing remarks. Please go ahead.

18:03 Okay, thank you. Thanks, everybody, for joining the call and listening to our remarks, and we will talk to everybody next time. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.