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Edited Transcript of PLZ.UN.TO earnings conference call or presentation 7-Nov-19 7:00pm GMT

Q3 2019 Plaza Retail REIT Earnings Call

FREDERICTON Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Plaza Retail REIT earnings conference call or presentation Thursday, November 7, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jim Drake

Plaza Retail REIT - CFO

* Michael Aaron Zakuta

Plaza Retail REIT - President, CEO & Trustee

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Conference Call Participants

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* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Sumayya Hussain

CIBC Capital Markets, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon. I would like to welcome everyone to the Plaza Retail REIT Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would like to advise everyone that this conference is being recorded.

I would now turn the conference over to Mr. Michael Zakuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zakuta.

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [2]

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Thank you, operator. Good afternoon. Thank you for joining us on our Q3 2019 results conference call. We are legally obliged to tell you that today's discussions include forward-looking statements. We'd like to caution you that such statements are based on management's assumptions and beliefs. Please refer to Plaza's public filings for a discussion of these risk factors.

We continue to be very positive about our business. Our strong pipeline of deals is starting to deliver robust growth that will continue into 2020 as revenues from new developments and redevelopments kick in over time. Our niche of value, convenience and specialty retail continues to perform. At the end of September, we attended the Toronto ICSC convention, our leasing team met with over 70 retailers or their brokers. The retailers present at the conference were there to pursue deals, and we see continuing demand for space in our market niche. Today's growth-oriented retailers are found in the following categories: value grocery, pets, sporting goods, specialty businesses, QSR, restaurants and fitness. Our leasing deal volume is solid, and we remain confident that these activity levels will continue into 2020.

On our last call for Q2 results, we looked at a number of photos of projects under construction. Through the third quarter, we started to see the opening of new stores in these projects. For today's call, we have included some recent photos of new stores on our website. You can open the presentation by going to our website, www.plaza.ca, click on the Investor Relations section, then click on Financial Reports and scroll down to Presentations and click on Q3 Analyst Conference Call November 2019 Photos.

The first slide shows the recently opened Pet Smart, HomeSense and Marshalls at our Galway project in St. John's, Newfoundland. The second slide shows a new Dollarama at Galway. We then move to Halifax. And the photo shows a new Value Village in a former Future Shop premises. We then continue down the highway to our Halifax Bayer's Lake property where we replaced Home Outfitters with Giant Tiger and Canada Computers. Moving into New Brunswick, we then see a photo of our newly built Ren's Pets in Dieppe.

In the next slide, we move to Montréal suburb of Dollard-des-Ormeaux, and we see a photo of our recently opened Winners store.

Moving off-island to Laval, we then see a new freestanding Dollarama. Heading further north of Montréal, we see a photo of a recently opened Princess Auto, their first store in Québec. Across the parking, we just opened a Québec cannabis store in our Saint-Jerome development.

Moving east or on the 401 to Brockville, we see a photo of the recently opened Leon's in a space formerly used as common area and small vacant enclosed mall stores.

In Q3, we continued construction of new stores in Galway as shown on the next 2 slides. The third following slide shows construction of a new facade on our Quispamsis property that we acquired last December. The construction of a new structure in front of the existing building is a creative way to transform a property's image. We have successfully used this transformation strategy in other projects as we greatly improved tenant signage and modernized the property's image.

Next slide shows the construction of a Milestone Restaurant in Moncton, New Brunswick. We then move to Granby, Quebec where we're building a small pad for Pizza Hut and Easy Financial.

The next slide shows our Brampton redevelopment well underway. We have constructed new building areas and are presently demolishing the old out-of-date part of this center.

We then move to Mississauga where we see photos of the Movati facilities under construction. This deal has been structured as a land lease.

I trust that this illustrates that retail is still very much alive and that growth opportunities are available to real estate entrepreneurs. We continue to see opportunities where others do not. An active developer such as Plaza has a true advantage as we are constantly interacting with retailers and adjusting to changes in retail real estate. We are very active in pursuing opportunities such as the redevelopment of challenged enclosed malls, recycling obsolete retail buildings, new developments following the demolition of existing building or buildings and new development following land assemblies based on demand from growth-oriented retailers. Our properties are typically smaller and very community-centric, attracting customers on a regular basis as they conduct their pre- and post-work routines. Plaza's tenant lineup feature value, specialty and necessity-based retailers who acquire a local physical presence. We are confident that our value-add business model is poised to take advantage of current retail trends and will create significant value for our unitholders.

I would like to welcome Jim Drake, our new CFO, to the call. This is Jim's first conference call, so if everybody will go easy on him. Jim, the floor is yours.

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Jim Drake, Plaza Retail REIT - CFO [3]

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Thank you, Michael.

In summary, Plaza's results for the quarter and year-to-date were impacted by a few items considered nonrecurring, namely 2 significant lease buyout transactions and nonrecurring general and admin costs. Excluding the impact of the lease buyouts, same-asset net operating income, which excludes any expansions or new construction on same assets, was up compared to the prior year, 2.1% for the quarter and 1.6% year-to-date. Also excluding the impact of nonrecurring items, FFO per unit was up as well, approximately 15% for the quarter and 6% year-to-date. The results show our recent developments, redevelopments and acquisitions are having a considerable positive impact on our NOI and FFO.

In addition, other income, which generally represents fees billed to our partners on co-owned properties including the leasing, developments and financing fees on properties under development or redevelopment is up notably over last year. This is important as this signals that the related rental revenue from these additional developments and redevelopments will follow shortly.

On asset sales, we sold $19.6 million of noncore properties to the end of the third quarter at values above our IFRS values, generating $11 million of cash. $12.7 million of these sales were former KEYreit properties that had an underwritten value of $11.7 million. As well, we recorded another meaningful fair value gain on investment properties during the quarter due to a further decrease in cap rates, largely stemming from higher values on third-party appraisals received. Total fair value gains for investment properties year-to-date were $19.8 million or approximately $0.19 per unit of net asset value creation. These sales and third-party appraisals continue to show there's value in our assets beyond that recognized on our balance sheets under IFRS.

We continued our major refinancing program where we are refinancing and placing new mortgages, locking in historically low rates for loan terms and generating capital for our business. To date, we have closed on $161 million at 100% of long-term financing for longer terms, better amortizations and generally lower interest rates. This program has generated $28 million of cash for Plaza, which has been used to reduce our operating line and thereby reducing operating line interest going forward. We're also currently looking on $49 million at 100% of long-term financing, which should generate almost $7 million of additional cash for Plaza. As the market remains a borrower's market, we will continue to review our portfolio for financing and refinancing opportunities.

Finally, under our normal course issuer bid due September 30, we repurchased 584,000 units, and we continue to repurchase units. We believe this is a desirable use of funds. It is accretive to FFO per unit and in the best interest of unitholders.

Those were the key points relating to our financial results for the quarter and year-to-date. We will now proceed to open up the lines for any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Jenny Ma from BMO Capital Markets.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [2]

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Welcome, and congratulations, Jim.

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Jim Drake, Plaza Retail REIT - CFO [3]

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Thank you.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [4]

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So Michael, you mentioned that there were some KEYreit assets that were sold. Can you remind us again, you were selling some assets in a high volume in the past, but are these still part of that initiative? Or are these sort of opportunistic sales of former KEYreit assets?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [5]

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I guess a little bit of both. Some of it is opportunistic, some of it was planned based on lease renewal and us trying to manage a little bit of timing in terms of losing NOI.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [6]

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So how much of the KEYreit assets would be left for sale over the next year or so?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [7]

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It's -- there are still assets that I believe will be sold. The numbers will not be significant. They will be less than what we've seen to date.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [8]

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Okay. Moving on to the refinancing opportunity. The refi that you've done this year was sort of at a weighted average of 3.9, which seemed a little high in the current context. So I'm just wondering if we can get some color on what we can expect for future refinancings and whether or not that 3.9 may have been weighted towards earlier this year when the rates were a little bit higher.

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Jim Drake, Plaza Retail REIT - CFO [9]

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It was weighted a little bit earlier this year, and we get some blended expense on existing mortgages that had fair bit of term left. So we had a slightly higher rate. Going forward, we'll see more market rates, which would be under 3.95 today.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [10]

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Okay. And would the view, just because you're coming off a higher in-place rate, to really maximize the term you can get on these renewals?

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Jim Drake, Plaza Retail REIT - CFO [11]

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Absolutely. We're generally very conservative on the mortgage front, so we'll take longer term over shorter term, subject to existing asset requirements.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [12]

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Okay. And then lastly, Michael, have you had any conversations with Morguard following the announcement?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [13]

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Yes. We just had some very simple discussions, talking about what's going on. And I think that the -- actually, the newspaper article that came out after that was very reflective of our discussions where they like our asset class, they like our management, they like the diversification of our geography and they saw an opportunity and they seized it and nothing more than that.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [14]

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So is the expectation that they'll remain a passive investor? Or do you expect them to somehow get involved in parts of your business?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [15]

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I think -- I don't see them as a -- I see them more as an investor. If we felt, perhaps, that they could help us, I think they would be prepared to look at that. But that has not been our discussion to date.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [16]

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Okay. So fair to say, the lines of communication are open and cordial?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [17]

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Yes, they are.

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Operator [18]

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(Operator Instructions) And our next question comes from Sumayya Syed from CIBC.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [19]

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Michael, I wanted to get your thoughts just on the potential of doing more collaboration for the other REITs like you've done with RioCan in the recent past and now that the mall owners are looking to reposition and look at some large vacancies, are you seeing more opportunities to work with them?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [20]

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I think we're seeing a lot of opportunities to work with various players that can benefit from our experience and expertise. We're definitely seeing that. Does it mean large REIT? No, not necessarily. But there are many property owners that I think can benefit from again our experience, our expertise in reworking challenged assets. And we definitely have a lot of stuff ongoing, would be joint venture-style deals just because, again, the owner is there and not necessarily looking to sell but would like to see change to their property, and that becomes our role. So it's something that you'll see, I think, in the future, more JVs than less.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [21]

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Okay. Great. That's helpful. And then just to move on to -- given the sort of recent interest for single-tenant-type assets in the market, could you speak to the Shoppers assets that you own and maybe note any fair value changes or cap rate trends for just that slice there?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [22]

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I don't know, Jim, do you have any thoughts on that? Yes.

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Jim Drake, Plaza Retail REIT - CFO [23]

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Yes. Absolutely. The Shoppers assets we have, have generally been relatively consistent on a cap rate basis. The stuff that would be closer to primary markets across our geography would probably see some minor compression in cap rates.

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Sumayya Hussain, CIBC Capital Markets, Research Division - Associate [24]

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Okay. But generally in line with the 7% cap for the overall portfolio?

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [25]

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No. Absolutely not.

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Jim Drake, Plaza Retail REIT - CFO [26]

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No. No.

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [27]

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But we would be running that at a lower number, and there's probably some -- a difference between what we're showing and what the market will actually pay. And we'll obviously solicit it on a regular basis from people looking to buy those types of assets. And it's been our approach to date that we do not sell those assets. We think it's a really interesting portfolio. We worked hard to build it, and we think that unitholders can benefit by owning it over time. We've been able to refinance some. We've renewed all of the leases that are -- that have been due in 2019 and most of 2020 is renewed. So we really like that asset class. And we think it's an important part of our portfolio. It gives great stability to our business. And therefore, it's not something that we're looking to sell even if somebody would pay us a big number at a lower cap rate than we're carrying.

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Operator [28]

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And Mr. Zakuta, there are no further questions in the queue at this time.

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Michael Aaron Zakuta, Plaza Retail REIT - President, CEO & Trustee [29]

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Thank you, operator. In conclusion, we continue to offer a very different real estate investment opportunity with our focus on very accretive developments and redevelopments. We are focused on growing our FFO per unit and our NAV. We will continue to recycle capital in order to fund our developments, and our per unit growth will drive down our payout ratios in order to strengthen our business. We've consistently demonstrated our entrepreneurial abilities by adapting to changing market conditions in order to grow our business. Insiders hold an important ownership position, and look forward to creating value for unitholders in the future. Thank you for participating in today's call.

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Operator [30]

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Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.