Toronto May 16, 2017 (Thomson StreetEvents) -- Edited Transcript of OneREIT earnings conference call or presentation Tuesday, May 16, 2017 at 3:00:00pm GMT
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* Richard M. Michaeloff
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Good day, and welcome to the OneREIT Q1 2017 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Richard Michaeloff. Please go ahead, sir.
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [2]
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Thank you for attending OneREIT's Quarterly Conference Call relating to the financial results for the first quarter ended March 31.
In addition to myself, we have Tom Wenner, our CFO. Our comments today will, in large part, refer to Management's Discussion and Analysis and financial statements that were issued yesterday, and I encourage you to refer to the safe harbor language found on Page 2 of the MD&A that deeply applies to this conference call.
During this call, we'll highlight our activities as well as key operating metrics and results for the first quarter. This will be a relatively brief call, given our last call concerning our annual results occurred just 6 weeks ago. We'll end this call with an open question-and-answer session.
We continue to strengthen the REIT through the following drivers: proactively pursuing lease renewals and seeking new tenancies; refinancing of our maturing higher-cost debt; the continuation of our development and redevelopment projects, most significantly, our Golden Mile and Yorkgate projects; maximizing the synergies available through the internalization of our property management; and implementing marketing strategies across different platforms, including social media, to drive traffic to our properties. In addition, the process to explore strategic alternatives previously announced on June 8 of last year is continuing. However, we have no additional information to add to our disclosure at this time.
The REIT's occupancy rate, as at March 31, was 88.5%, a slight decline from the previous quarter and largely due to the departure of Brands Gone Wild at Lincoln Value in St. Catharines, to represent 22,000 square feet. Impact to revenue was minimal, given that they occupied less desirable space at the back the property.
In Q1 of '17, 6 new leases representing 31,000 square feet commenced with an average base rent of $13.35. A sample of the leasing activity during Q1 includes a 1224 Dundas Vision Electronics 11,500 square feet and also a 1224 Dundas The Furniture Place representing 12,300 square feet. The REIT also executed 34 lease renewals, which took effect in the first quarter, representing approximately 200,000 square feet with a positive weighted average rent increase of 5.7%.
In aggregate, the REIT finalized 16 new leases taking effect in 2017, representing 216,000 square feet with a weighted average base rent of $17.60. A sample of new tenants taking effect in '17 include: at Golden Mile, Real Canadian Superstore at 92,000 square feet; at Yorkgate, City of Toronto, representing 44,000 square feet; at South Hill in Prince Albert, a Dollarama at 10,000 square feet; and at our Golden Mile Shopping Centre in Regina, another Dollarama at 11,000 square feet. We also expect to finalize a 15,000 square foot liquor store lease within the next week at our Golden Mile redevelopment and are in advanced negotiations for a 12,000 square foot liquor store pad in another of our western properties.
Over the past year, the retail industry has witnessed a number of tenant closures across a range of retail categories. Fortunately, we've had minimal exposure to these retailers.
On the debt front, the REIT's weighted average cost of mortgage debt is an all-time low and stands at 4.21%. Our debt maturity profile is well laddered, and we continue our efforts to minimize refinancing risk while benefiting from the current low interest rates. We have approximately $51 million of mortgage debt that mature in 2017, bearing a weighted average interest rate of 4.9%. We anticipate saving approximately 150 basis points from the weighted average interest rate through refinancing this debt, which will translate into savings of an additional $800,000 per year on an annualized basis. Over the next 10 months, we have $68 million of mortgage debt maturing, which we expect will generate incremental proceeds of approximately $30 million.
On our redevelopment and development activities, our largest development project currently underway is the conversion of the Golden Mile Shopping Centre in Regina from an enclosed mall to an open-air center with a planned investment of approximately $30 million. The cost of this project will be fully funded by our construction facility, and cost to date for the project totaled approximately $27 million. On-site activities commenced in March of 2015, and progress of the development to date has been completed within budget and on schedule.
A new 92,000 square foot Real Canadian Superstore occupies the central portion of the shopping center and opened for business and commenced paying rent this past April 28. The southern portion of the mall, which has been reformatted to accommodate a new 24,000 square foot Goodlife, which opened in March of 2016. Last phase of the redevelopment is expected to be completed by early 2018, and we're in advanced stage in leasing up a majority of the space through a strong mix of tenants.
On completion, the shopping center will feature approximately 256,000 square feet of GLA, representing an additional 21,000 square feet of leasable area. We anticipate the completed shopping center will contribute an additional $3 million to our baseline NOI, which we expect will generate approximately $0.02 per unit of FFO.
At Southland Mall, we're pleased to announce that the REIT has entered into a lease agreement for an 11,000 square foot Sobeys Liquor store pad with an initial lease term of 10 years and additional renewal options. The development is expected to commence in the upcoming months with a planned investment by the REIT of approximately $2.5 million. In addition, at Yorkgate Mall in Toronto, work has commenced on the 43,000 square foot premise to be occupied by the City of Toronto under a 10-year lease. They will join the 21,000 square foot Planet Fitness, which opened this past December. We expect the combination of these 2 new tenancies to drive significant additional foot traffic to this project.
On the marketing front, we continue to increase awareness of our brand and shopping centers through national and local marketing programs that focus on customer and tenant experience, strategic partnerships and new media. The REIT has also launched a new digital marketing platform called [Boost]. Boost is a digital marketing tool that provides our national and regional retailers the ability to seamlessly distribute the promotional material across our properties. This media platform allows our tenants the ability to customize our marketing efforts and then distribute through other properties and media channels with a single click. We're excited that OneREIT is first to market to roll out such a comprehensive digital marketing program.
I'll now ask Tom to review our fourth quarter results and report on our key operating metrics.
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Tom Wenner, OneREIT - CFO [3]
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Good morning, everyone. For the 3 months ended March 31, 2017, net operating income was $18 million. FFO adjusted was $9.4 million, a 3.9% increase compared to $9.1 million recorded in Q1 last year. FFO adjusted per unit was $0.108, an increase of 2.9% compared to the similar quarter last year. Our FFO adjusted payout ratio for the quarter was 69.5%.
The underlying quality of our cash flow continues to improve in terms of asset quality, tenant covenant and lease term. Our total assets are $1.2 billion. Our debt-to-gross book value ratio at March 31 was 51.7%, excluding our convertible debentures, and 58.1% when including our convertible debentures. The REIT continues to operate well below our leverage guidelines set within the declaration of trust and our credit facilities.
Our weighted average cost of mortgage debt is 4.21%, representing the lowest level in our history. Our mortgage maturity profile is also well laddered with an average term to maturity of 5.5 years. Our interest coverage ratio on a 12-month rolling basis is 2.08x, and our debt service coverage ratio was 1.39. These ratios are well within the covenants of our operating line of credit.
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [4]
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This concludes the formal portion of the conference call. At this time, we invite questions from our call participants.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And we'll take our first question from Sam Damiani with TD Securities.
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Sam Damiani, TD Securities Equity Research - Analyst [2]
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Just on Town 'n' Country Mall. Just wondering what the leads is there in terms of leasing up the anchor space and potential sale.
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [3]
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The anchor space there, we're, again, currently close to finalizing our lease still there. Don't see any impediments in doing that. So again, very close on that. In terms of the sale, the sale right now, we're in a little bit of limbo. But we do expect that during fiscal 2017, that property will be sold.
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Sam Damiani, TD Securities Equity Research - Analyst [4]
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Good. Great and hope that goes well. Finally, just on the SmartREIT VTB. Just wondering, is there an intention to pay that off? And like -- I guess why -- is there any reason the REIT wouldn't pay that off this fall?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [5]
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No. I had mentioned a little earlier on the call that we -- I said in the next 10, 9 to 10 months, we do have about $68 million of total mortgage debt maturing and expecting incremental proceeds on there of $30 million. So that would equal basically the amount of the VTB.
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Sam Damiani, TD Securities Equity Research - Analyst [6]
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Okay. Maybe just finally, are there any Penguin Pick-Up locations on OneREIT locations?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [7]
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Not as of yet. Not yet.
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Sam Damiani, TD Securities Equity Research - Analyst [8]
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Any plans for that in the future?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [9]
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We are looking at that. But at this point, there are none.
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Operator [10]
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(Operator Instructions) We'll take our next question from Troy MacLean with BMO Capital Markets.
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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [11]
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Just curious, you have a number of pad intensifications in the works. Is there much more demand to add more pads in 2017?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [12]
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Yes, I would say so. So I mentioned like we have, currently, 3 liquor stores, either -- leases either done or about to be finalized, 15,000, 12,000, 11,000 square feet. 2 of those represent pads in Western Canada. So between those 3 liquor stores, we're looking at about 38,000 square feet. 2 are pads. So it's very much circumstantial, and we have had interest expressed in a couple of locations. So there's another pad deal that we're looking to finalize in the next couple of days right now in one of our other properties, and that will -- basically, we represent that on our next quarterly call. But yes, we are staying interested on pads for sure.
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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [13]
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And on the pad -- and this -- so the cost to build the pads are about $2.5 million. What's the yield, expected yield on that once the project's completed?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [14]
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Yes. We're seeing yields like, say, 9% to 10%.
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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [15]
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And then just my final question. Was -- any comments on the overall leasing market? Like are you seeing improving tenant demand, either by geography or across different property types?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [16]
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Yes. I'd say it's all of that. So it really depends on the property type, depends on the location. And again, in Alberta, you see the market there, it's a little bit softer. We fortunately don't have a lot of fashion tenants in our portfolio, and I think you've seen those guys probably be the most impacted. There's -- on the Sears front, we always hear articles in the media about Sears. Luckily, we've got minimal exposure to Sears. We have -- just the one Sears location at Town 'n' Country, and that represents 60,000 square feet on one floor. So again, that's -- we're fortunate in that respect. And even that location, it's -- the type of --the way the building is constructed, probably fairly easy to reformat that. So we've been fortunate that we haven't really been impacted significantly.
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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [17]
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And then just about the -- in Saskatchewan, what's the overall demand there from retailers, like improving, staying the same?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [18]
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I would say staying the same at the moment. So it's fairly healthy at this point. Saskatchewan certainly hasn't seen the softness that Alberta has experienced, but we're seeing leasing interest holding pretty steady. As I said, one of the pads I mentioned was 11,000 square foot liquor store pad at Southland Mall. We're still seeing a fair amount of interest in our space in Southland. So our leasing guys are currently working on about 3 to 4 new deals currently on some vacant units there. Golden Mile, again, that project is doing really well right now. It's out there for the grand opening of the Royal Canadian Superstore on April 28. It was interesting that morning, the store opened up at 7 in the morning. I think there was between 800 and 1,000 people lined up for the doors to open and getting a lot of solid leasing interests for the remaining. As I said, one of the liquor stores I mentioned is 15,000 square foot unit at that property as well. So the Golden Mile project is pretty close to being fully restocked, so still strong interest there.
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Operator [19]
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And we'll take our next question from Michael Smith with RBC Capital Markets.
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Michael Smith, RBC Capital Markets, LLC, Research Division - Analyst [20]
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What was the same property NOI growth for the quarter?
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Tom Wenner, OneREIT - CFO [21]
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Well, on a same property basis, strictly looking at it, it would be a negative 1.3%. But implicit in that 1.3% is a reallocation of some of the head office expenses into the property management side of the operations, which flow through our property operating expenses. So in the true sense, it's not that 1.3%. It's probably closer to 0.3% of a decline. So in total, same property, as measured, would have been lowered by about $250,000, and a substantial chunk of that would've been from the reallocation of some of the head office expenses.
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Michael Smith, RBC Capital Markets, LLC, Research Division - Analyst [22]
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Okay. And what's your expectation for full year 2017?
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Tom Wenner, OneREIT - CFO [23]
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Well, we're probably looking close to 1.5% in total on the growth side with some of the planned lease-up that we have coming on. We're going to have some things come here more, so towards the latter part of the year, like the city deal in -- at the Yorkgate. But starting earlier, we have the Planet Fitness that has now kicked in at Yorkgate; the Real Canadian Superstore at Golden Mile. So those are big contributors to some increases. But overall, it's probably in that 1.5% to 2% range.
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Michael Smith, RBC Capital Markets, LLC, Research Division - Analyst [24]
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Okay. And given the leasing you've got on the go, what do you think occupancy will end the year at?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [25]
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I could see probably another 100 to 150 basis point uptick, potentially 200.
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Michael Smith, RBC Capital Markets, LLC, Research Division - Analyst [26]
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Okay. And that would be excluding selling anything like Town 'n' Country here?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [27]
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Right.
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Operator [28]
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(Operator Instructions) We'll take our next question from Sam Damiani with TD Securities.
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Sam Damiani, TD Securities Equity Research - Analyst [29]
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Actually, just watching online. The video of the opening at Golden Mile there looks fantastic, so congratulations there. At Kindersley Mall, I think last quarter, you had mentioned you're getting some good traction on backfilling the vacancy there on the grocery store. Any update on that front?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [30]
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Yes. Now the lease on the grocery store space run until November of this year, so it's currently still under lease, and very advanced discussions right now for a replacement tenant to take the entire premises there. So we're feeling pretty good about that.
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Sam Damiani, TD Securities Equity Research - Analyst [31]
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And a grocery use as well?
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [32]
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Yes.
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Operator [33]
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And it appears there's no further questions over the phone at this time.
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Richard M. Michaeloff, OneREIT - CEO, President and Trustee [34]
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Yes. I'd like to thank everyone participating in our quarterly call and look forward to speaking with you in the future. Thank you.
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Operator [35]
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And this concludes today's call. Thank you for your participation. You may now disconnect.