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Edited Transcript of MRT.UN.TO earnings conference call or presentation 1-Aug-19 8:00pm GMT

Q2 2019 Morguard Real Estate Investment Trust Earnings Call

Mississauga Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Morguard Real Estate Investment Trust earnings conference call or presentation Thursday, August 1, 2019 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Tamlin

Morguard Real Estate Investment Trust - CFO

* John Ginis

Morguard Real Estate Investment Trust - Director of Asset Management - Retail

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Conference Call Participants

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* Jonathan Kelcher

TD Securities Equity Research - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Morguard's Real Estate Investment Trust Second Quarter Results Conference Call. (Operator Instructions) Note that the conference is being recorded on Thursday, August 1, 2019.

I now would like to turn the conference over to Andrew Tamlin, CFO. Please go ahead, sir.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [2]

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Thank you. Just as a point of introduction, my name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. I am joined by John Ginis, Assistant Vice President of Retail Asset Management; along with (inaudible) VP of Eastern Asset Management; along with Rai 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 second quarter 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. Thank you.

Morguard REIT is a diversified commercial REIT and has a diversified portfolio of 49 retail office and industrial properties, consisting of approximately 8.7 million square feet of gross leasable area in 6 provinces. The trust asset management team is focused on continually improving the returns from the assets currently owned and making quality investments that are accretive in the long term.

The second quarter of 2019 was a relatively quiet quarter with results consistent with last year and with expectations. Occupancy rates have decreased slightly year-over-year, 93% at the end of Q2 2019 as compared to 94% at the end of Q2 2018. This decrease is primarily due to some new retail CRUs from development projects that have come on stream in the last 6 months, along with continued softness in the Alberta office market. Net operating income for the second quarter increased slightly year-over-year to $36.957 million from $36.862 million, due to enhanced income from the redevelopments that have come on stream over the last 12 months.

Same asset net operating income is down slightly, 2.2%, primarily due to continued softness in the 3 enclosed regional malls that previously had Sears. The trust is actively working on plans to demise these facilities and to retenant them. During the quarter, the trust commenced the redevelopment of the former Sears premises at Pine Centre in Prince George, British Columbia. This new wing will consist of approximately 76,000 square feet of redeveloped GLA and will be anchored by a Winners/HomeSense slated to open in 2020. It will also feature an additional retailer, complemented by small bay CRUs situated along a common area mall corridor. Approximately 61% of the space under redevelopment is committed and the total cost of this project would be approximately $17 million. Plans for the other 2 facilities, Cambridge and St. Laurent in Ottawa will be shared when finalized.

Turning to interest expense. It has increased 6.8% due to a small increase in borrowings and higher short-term rates in our variable borrowing on a year-over-year basis. Basic FFO per unit has decreased slightly to 36% -- $0.36 from $0.37 in 2018, due to the slightly higher interest expense. Basic AFFO decreased slightly to $0.26 compared to $0.27 per unit in 2018. The debt-to-asset ratio remains relatively unchanged at 45.1% as compared to 44.1% from a year ago and compared to 45.1% at year-end.

Since January 1, 2019, the trust has delivered 50,400 square feet of new or remerchandised area. Included in this area is 6,800 square feet of new leasable area at Pine Centre in Prince George, British Columbia. This is currently 100% leased and is based around a restaurant called Browns Socialhouse. Further, another 43,600 square feet of remerchandised former Safeway space at Parkland Mall in Red Deer was brought on stream as well. This space is 54% leased and is focused around the new Winners.

The trust continues to be active from a redevelopment standpoint, recycling our capital into projects at our existing properties that are accretive. The trust has other active retail development projects on the go, all at The Centre Mall in Saskatoon, Saskatchewan. The first one that is expected to be completed is 30,000 in gross leasable area for a new freestanding pad for Cineplex, which is expected to be completed in the third quarter of 2019. The trust is also working on a major redevelopment of the mall with modernization of both the interior and exterior of the mall, including the food court. This is going well and is expected to be completed later in 2020.

The trust revalues its properties every quarter in accordance with IFRS. Fair value adjustments for the second quarter of 2019 was a loss of $24.6 million. This is primarily due to fair value adjustments in the trust's enclosed mall portfolio.

During the 6 months of 2019, there have been $18.7 million spent on capital, down from $32.9 million in 2018, primarily due to less development projects on the books. It is the trust's primary financing objective to ensure we've got ready access to funding for our redevelopment projects and to maintain flexibility with our capital needs. With this in mind, the trust increased one of our bank lines of credit by $10 million during the quarter without any added security posted. The trust continues to use a sustainable reserve for maintenance capital and leasing. This amounts to $25 million for the year or $6.250 million for the quarter. This is based on a review of the 3-year forecasted leasing and maintenance capital needs. Actual expenditures were $5.4 million for the quarter. Lastly, the trust will be closing a small, nonstrategic single-tenant industrial property during the third quarter and as such, has presented this asset as an asset held for sale. The expected proceeds are $15.9 million.

Wrapping up, we continue to the positive about our business and the objective of building value for our unitholders. Our strong pipeline of redevelopments in recent years have been very well received and we look forward to similar projects in the future.

We'll now open the floor to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Jonathan Kelcher of TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

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First, just on the enclosed retail. The renewals were quite a bit lower than the expiries in the quarter and I was hoping you could give us a little bit of color on that?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [3]

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Jonathan, it's John Ginis here. Some of the expiries were forced expires because we had a lot of turnover because of some bankruptcy that had (inaudible) during the first 6 months of this year. Some of the units that were expired were held for other purposes and so far as long-term remerchandising. That explains the balance of the reason why retention was a little bit lower.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [4]

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Okay. And then I guess just sticking with that, if I look at the expiries over the balance of the year, the -- more than half are in the enclosed retail, what can we expect on that in terms of -- what do you think you'll be able to hold on to in terms of occupancy as well as can you maintain or improve on the $24 expiring rent?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [5]

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So when you look at the expired profile for the last 6 months of this year, the large format guys, we don't have much concerning so far as being able to renew their leases. It's hard to speak on the small bay CRU, but there's nothing that steps out and suggest that we won't be able to retain, based on historical parameters, occupancy in the shopping center.

In terms of growth, in terms of income, it's hard to speculate, right? So I mean do we accept the huge retraction, no.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [6]

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Okay. So you'd expect plus or minus renewed in line with history, so you get the majority of them at -- in and around the $24?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [7]

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On the retention? Yes. I mean it's hard to comment on weighted average rents at this point.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [8]

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Okay. And then just lastly, the fair value write down in the retail, is it -- was there 1 or 2 malls that pertained to? Or was that just sort of a little bit at a lot of -- a bunch of them?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [9]

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In terms of fair value gains and losses, is that what your question is in reference to?

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Jonathan Kelcher, TD Securities Equity Research - Analyst [10]

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Yes.

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [11]

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I mean we're conservative when it comes to underwriting for our assets. So incrementally, we're raising cap rates when it comes to overall appraisal with enclosed retail, and the bigger hit was then in enclosed retail side for sure.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [12]

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So it's 1 mall that took the hit? Or was it...

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [13]

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I mean, universally, we're looking at our enclosed retail acknowledging that the change that are happening in the enclosed mall space with more scrutiny. Some assets are taking a harder hit than others. I'm not going to suggest that it's completely universal that every asset in the enclosed mall space took the same fair value loss, some of them actually improved quarter-over-quarter.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [14]

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Okay. And then I guess one more. The development in Saskatoon, the major mall reno there, that's I guess overall north of $30 million. What sort of return are you targeting on that capital?

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John Ginis, Morguard Real Estate Investment Trust - Director of Asset Management - Retail [15]

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So there's two components to that. There is one where we're building a new prototypical path for Cineplex, as Andrew noted. That makes about $10 million worth of investment by the way. The balance is renovation of the mall to the tune of just -- approximately $19 million. It's old and dated infrastructure, hence, that's what prompted us to reinvest in the mall itself. I'm not going to comment on return metrics at this point, I'll just say that, that's the right thing to do for the real estate. For both merchant, for Cineplex and ourselves. And overall, helping us, hopefully, to improve leasing at the Centre with an improved cosmetic renovation.

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Operator [16]

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(Operator Instructions) And at this time, Mr. Tamlin, it appears that we have no other questions. So I would like to turn the call back over to you, sir.

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Andrew Tamlin, Morguard Real Estate Investment Trust - CFO [17]

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Okay. Thanks, everybody, for participating and listening to the call, and enjoy the long weekend. Take care.

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Operator [18]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.