Choice Properties Real Estate Investment Trust (CHPUN) Earnings Call Transcript & Summary

Good morning. My name is Denise, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Choice Properties Real Estate Investment Trust Annual Meeting of Unitholders. Mr. Galen Weston, you may begin your conference.

Good morning, and welcome to the 2020 Annual Meeting of Unitholders for Choice Property Real Estate Investment Trust. I'm Galen Weston, and I serve as the Chairman of the Board of Trustees. Every year, we look forward to this meeting and the opportunity it provides to speak with our unitholders. Today, the social distancing measures in place as a result of COVID-19 mean that we find ourselves unable to gather in person. And while this meeting of unitholders will certainly be different than previous years, our team has worked hard to replicate as best as we can our regular environment in a virtual format. Joining me this morning via webcast are Rael Diamond, our President and Chief Executive Officer; Mario Barrafato, our Chief Financial Officer; and Doris Baughan, our Senior Vice President, General Counsel and Secretary. Several other members of Choice Properties Board of Trustees and Senior Management team are also attending remotely, either by teleconference or by webcast. I would now like to call this Annual Meeting of Unitholders of Choice Properties Real Estate Investment Trust to order. I will begin today's meeting by outlining how voting and questions will be addressed in this virtual format. Usually, and this year is no exception, the majority of unitholders submit their proxies or voting instructions in advance of the meeting. Under our normal practice, unitholders or their proxies who wish to vote will be required to attend the meeting in person. Instead, voting during today's meeting will be conducted through this online platform. When we are ready to table an item of business for a vote, you will see voting options appear on your screen. If you have voted in advance of the meeting and do not wish to revoke your previously submitted proxies, then you do not need to do anything. Another matter in which this virtual meeting will be different is with respect to questions which will be accepted through this online platform. To submit a question, click on the question-and-answer messaging icon at the top of your computer screen. When submitting a question, please identify whether it relates to a motion being considered as part of the formal business of the meeting or whether it is general in nature. We will address questions directly related to a particular motion at the appropriate time of the meeting and save general questions until after the formal business has been completed. Questions with common themes may be grouped together for efficiency. To respond, our Corporate Secretary will read the questions aloud, when requested, and either I or a member of the management team will respond. We will make every effort to answer all your questions during today's question-and-answer period. However, in the interest of time, we will limit that portion of the meeting to 20 minutes, and we'll address any unanswered questions in a timely manner afterwards. Now before we proceed with the formal part of the meeting, I'd like to acknowledge the remarkable efforts of the team at Choice Properties over the last year, and in particular, during the pandemic period, which we are all currently experiencing. As a landlord to hundreds of local and regional businesses across Canada, Choice Properties has played an important role in supporting the essential elements of our economy, which continue to operate as well as those that are currently shuttered and facing significant uncertainty. When faced with that reality, the team quickly put together a program to provide qualifying small businesses and independent tenants who have requested relief with a temporary rent deferral of 60 days. They have also continued to ensure the safety and security of the hundreds of properties that continue to serve Canadians, all while ensuring the health and well-being of our colleagues, tenants and their customers. On behalf of the Board and all unitholders, I'd like to thank everyone in the Choice Properties organization for their dedication, resilience and commitment during this unique time. I will now proceed with the formal part of the meeting. I would ask Ms. Doris Baughan, Secretary of Choice Properties, to act as Secretary of the meeting. AST Trust Company is acting as scrutineer of the meeting by way of its representatives, Radha Mulchan-Singh and Lori Grinton. Only unitholders of record at the close of business on March 9, 2020, or their proxies, are entitled to take part in and vote at this meeting. To make the best use of our time, certain unitholders have been asked to move and second the proposals, which are called for in the notice of the meeting. A copy of the notice of the meeting and proof of its mailing has been filed with Choice Properties. The scrutineers' report indicates that a quorum is present. I now declare that this annual meeting has been properly called and is duly constituted for the transaction of business for which it has been called. Today's agenda will consist of remarks from Choice Properties President and CEO, Rael Diamond; and CFO, Mario Barrafato. These will be followed by the submission of Choice Properties 2019 annual financial statements and then 3 resolutions: first, to elect the Board of Trustees for next year; second, to appoint Choice Properties external auditor for fiscal 2020; and third, to consider an advisory resolution on Choice Properties' approach to executive compensation. Following that, we will have a 20-minute question-and-answer period that I previously mentioned. On behalf of those speaking today, I'd like to note that their comments may include forward-looking statements. And unless otherwise noted, they will be referring to non-GAAP financial measures. Details regarding forward-looking statements and non-GAAP financial measures are on screen and can be found in the Choice Properties annual report to unitholders, as updated in its first quarter 2020 report to unitholders. Actual results could differ materially from the forecast, projections and conclusions in the forward-looking statements made today. During the meeting, we may pause from time to time to review messages from the Corporate Secretary as we coordinate from a distance. Thank you for your patience as we do so. Now before I turn the floor over to Rael and Mario, I'd like to take the opportunity to thank 2 trustees who are not standing for reelection this year, Anthony Graham and Paul Weiss. Tony is stepping down after having served on the Board since 2017, including 2 years as its Chair. During his tenure, Tony was a dedicated trustee who brought his deep experience and insight to bear in helping shape the strategic direction of Choice Properties. Paul is stepping down after having served on the Board of Choice Properties since its inception in 2013. During that time, Paul was an invaluable contributor and acted as Chair of the Audit Committee. On behalf of the Board of Trustees, I'd like to thank Tony and Paul for their service. We are sincerely grateful for their contributions, and it has been a pleasure to work alongside them both. At this point in the meeting, I'd like to call upon Rael Diamond, President and CEO; and Mario Barrafato, CFO of Choice Properties, to present an update on the business.

Thank you, Galen. Good morning, everyone. We are pleased to welcome you to our 2020 annual meeting. We always welcome the opportunity to engage directly with you, our unitholders. Let me start by acknowledging that the impact of the COVID-19 pandemic is profound. We all worry about the health and safety of our families, friends, coworkers and many others. The economic consequences of COVID-19 for numerous individuals and businesses is devastating. My message to you today is that we have moved quickly and are working diligently to manage the effects of the pandemic on both the health and safety of the Choice Properties community and the economic well-being of our stakeholders. We will get through this enormous challenge. On the health and safety front, most of our employees are working from home. I'm incredibly proud of the hard work and determination they have adapted and remained connected to both their coworkers and to our tenants. Our properties are secure, and enhanced health and safety measures are in place. Internally, our systems and processes are working smoothly. I want to thank you, our employees, for going above and beyond for your fellow coworker, our tenants and all other stakeholders. Let me say that again. Thank you. On the economic front, many of our retail tenants are grocery stores and other necessity-based businesses, including Loblaw. These necessity-based tenants account for approximately 75% of our annual retail revenue. These tenants provide stability to our business. We also benefit from being diversified in our industrial, office and residential assets. As Galen mentioned, as one of Canada's largest landlords, we have an important role to play in helping Canadians and their businesses during these unprecedented times. Earlier this month, we announced that we are assisting qualifying small tenants with a temporary rent deferral. To date, the feedback from these tenants has been very positive. We're also paying close attention to the efforts of the various levels of government across the country to assist tenants with rent relief. We look forward to continued collaboration on that front. Finally, as Mario will discuss in more detail, Choice has a strong balance sheet and ample liquidity. We took advantage of a strong market in Q1 to raise debt. And because of the deleveraging activities we undertook in 2019 with no significant debt maturities in 2020, this too gives us confidence in our ability to weather the market volatility. While the current pandemic has changed our short term focus, over the long term, the key pillars of our business model remain the same. We will continue to focus on generating stable and growing cash flows and creating long-term value for our unitholders. We aim to do so by owning, managing and developing high-quality assets. We have an exceptional portfolio of 706 income-producing properties, totaling 66 million feet of gross leasable area. We also have an impressive pipeline of future development opportunities. This combination provides the foundation for us to deliver on our goals of stability and growth for investors over a long-term investment horizon. For us, stability means preservation of your capital investments and the reliability of your monthly distributions. And growth means distribution and net asset value growth over time. I'll now hand it over to Mario to talk about our portfolio.

Thank you, Rael. Our portfolio has 2 distinct features: quality and diversity. And both enable us to deliver the stability and the growth our investors expect. Roughly 80% of our real estate portfolio is retail. As Rael mentioned, this is mostly made up of necessity-based tenants. When we say necessity-based, we mean retailers that sell or provide essential goods and services such as a grocery store or a pharmacy. These tenants tend to maintain more stable operations even during this chaotic time. Although we anticipate that COVID-19 will have the most notable impact on retail tenants, the impact on our portfolio should be mitigated by our hard concentration of necessity-based tenants anchored by Loblaw. Beyond retail, we also own high-quality industrial, office and residential properties in Canada's largest markets. This diversification enables us to reduce risk, stabilize cash flows and open up more avenues for investment. Our industrial portfolio is located in Canada's most critical distribution markets. It includes both distribution centers for Loblaw and high-quality generic industrial properties. By generic, we mean distribution facilities that are of a size and configuration that are in demand by a wide range of tenants. Our office portfolio is focused on large, well-located buildings with an emphasis on the downtown core in some of Canada's largest cities. And finally, we've added rental residential to the Choice asset mix, adding another layer of income diversification. Our residential portfolio is located in Canada's major markets, and as Rael will speak to, will include both newly developed rental buildings and residential focused mixed-use communities. So overall, this diversification by both asset class and geography contributes significantly to our income stability. At Choice, we invest in properties we intend to hold for the long term. However, at times, a property may no longer fit with our strategy because of changing market conditions. To preserve and grow our net asset value, we have an active disposition program. We take the proceeds from dispositions and redeploy them into higher quality or higher growth assets. We call this capital recycling. We were active in capital recycling in 2019 with total dispositions of approximately $470 million. This included the sale of a portfolio for proceeds of approximately $425 million consisting of 27 stand-alone retail properties and 3 distribution centers. We then reinvested the proceeds into high-quality buildings, future development sites and debt reduction, all significantly strengthening our balance sheet. I'll now pass it back to Rael, who will speak to our developments.

Thank you, Mario. In addition to our income-producing property business, we also have a significant development business. Some of our best opportunities to add high-quality real estate are going to come from our development activities. In 2019, our achievements were notable. We completed 32 development projects at a total cost of $232 million. This delivered over 1 million square feet of best-in-class real estate. This was at a cost below what the assets could be purchased for on the open market. Looking forward, we expect to invest approximately $1 billion into our current active development pipeline, of which we've already invested $410 million. Most of this active pipeline is focused on rental residential, primarily within the Toronto area. Although we've only recently entered the residential asset class, our residential portfolio is expected to total an impressive 1,500 units when these developments are complete. The potential to redevelop many of our existing urban retail properties is one of our significant competitive advantages. These properties are close to public transportation, and our plan is to add density and turn them into mixed-use residential communities. Currently, we have 4 sites in active planning, including 3 in Toronto and 1 in Vancouver. We're also in the early stages of planning several other sites in Toronto and expect to have more to report on this soon. The future development potential is best explained by looking at an example. Choice owns the 1.6 acre site located at the intersection of Woodbine Avenue and Danforth Avenue in the Danforth neighborhood of Toronto. The site is exceptionally well-located as it is directly adjacent to the Woodbine TTC subway station. Today, the property is occupied by an older generation grocery store with a difficult configuration. We intend to add 2 mid-rise rental residential buildings with direct access to the subway and a relocated grocery store at street level. This site is just one example of why we're incredibly excited about the extent of these mixed-use opportunities. If you take away just one thing about our portfolio, it is this. We have a robust income-producing property portfolio. And despite some short-term headwinds, we expect that over the long term, this portfolio will deliver stable and growing cash flows. We have great traction in our development program, and we expect it to provide long-term growth to our portfolio. Together, the combination of stability and growth is at the core of Choice's commitment to driving long-term value for our unitholders.

Thanks, Rael. In addition to our significant development pipeline, another competitive advantage we have is our strong balance sheet. 2019 was a transformational year as we made great improvements to our balance sheet, ending the year with debt and liquidity measures among the best in the industry. Specifically, we lowered our debt level by $600 million, using proceeds from an equity issue and property sales. We reduced our debt level by approximately 10%. With a debt-to-EBITDA ratio of 7.5x, we are now one of the lowest levered REITs in Canada. We've built up a large pool of unencumbered assets that we can either finance or prune to raise capital. At the end of Q1, our unencumbered assets had a value in excess of $12 billion. We repaid amounts drawn on our credit facility, giving us $1.3 billion of borrowing capacity. And as everyone knows, liquidity is critical in this uncertain environment. All these initiatives support our investment-grade credit rating, which gives us better access to debt capital, again, something extremely valuable in this challenging environment. So from our low debt level to our high liquidity level to our investment-grade credit rating, we believe we are well positioned to manage the current challenging environment. Getting back to the topic of steady, reliable performance. In February, we announced our financial results for the year ended December 31, 2019. And earlier this week, we released our results for the first quarter of 2020. For the year ended December 31, 2019, funds from operations, or FFO, per unit was $0.99 compared with $1.03 per unit in 2018, a decrease of $0.04 per unit. FFO benefited from an increase in same-asset net operating income, completed developments and lower interest costs. However, we chose to reinvest this growth to reduce leverage and solidify our balance sheet, which led to the slight decrease in FFO per unit. In the first quarter of 2020, we further improved our balance sheet. We issued $500 million of unsecured debentures for a term of 14 years at a cost of 3.15%, financing that looks very advantageous compared to the rates in the current environment. The proceeds were used to repay all of our maturing 2020 debentures. As a result of this transaction, we have no significant debt maturities for the remainder of the year, reducing our risk profile and leaving us well positioned. So overall, we are pleased with our financial results and the direction of our business. Disciplined financial management has provided stability to our business and will help us navigate the near-term challenges we may face. In 2019, we were proud to launch our first sustainability and responsibility report. We felt that committing to work in a sustainable manner fits naturally with our objective of long-term value creation. By focusing on sustainability, we'll create a more efficient operating platform and reduce our environmental footprint. We'll improve the quality of our buildings, leading to high occupancy and value protection. We'll improve relationships with our key stakeholders and give back to the communities we work and live in. We'll drive innovation in our future developments. We'll create a culture our employees can be proud of. Since our first report, we've embedded environmental, social and governance goals into our business. We formed a steering committee of senior leaders in our company, and we have launched tools that help us measure our performance. On our website, you can find our latest report that updates our progress and outlines next steps in our journey. Some of the highlights from 2019 include progress towards achieving our targets for energy and water consumption, waste reduction, greenhouse gas emissions and building certifications. The launch of Choice Cares, a program that empowers our employees to give back to our communities. In our first year, we raised over $300,000 and volunteered over 1,200 hours in support of 8 charities across the country. And we made our first submission to the Global Real Estate Sustainability Benchmark, or GRESB, as it is now called. It is a global body that gathers environmental, social and governance data and benchmarks performance within the real estate industry. Our ESG program has grown and will continue to evolve in the coming years. We're very excited and look forward to sharing more with you next year.

Thank you, Mario. We're very proud of our accomplishments in 2019. Although we face challenges with the current pandemic, I believe that we'll emerge from this crisis in a better position than most. There are 4 reasons why I say this. First, our team. As I said earlier, I'm proud of our team's response to date. We have a talented team that is committed to delivering on our goals of both stability and growth to our unitholders over a long-term investment horizon. Second, our portfolio. We are in a high-quality income-producing portfolio that is now 66 million square feet and a development program that will provide opportunities to add high-quality, stable real estate assets to our portfolio over the coming years. Next, our balance sheet. We have a strong balance sheet with over $1.3 billion of liquidity. This provides the flexibility to help insulate us in the face of market volatility. And finally, our strategic relationship with our major tenant and the sponsorship of our major unitholder. Loblaw is our largest tenant, representing 56% of our gross revenue. Our relationship with Loblaw is strong and will continue to create ongoing opportunities for us. George Weston Limited is our largest unitholder, owning approximately 63% of Choice and is committed to support Choice as a long-term owner, manager and developer of a high-quality, diversified portfolio. These relationships will continue to provide stability and growth for Choice. We would also like to thank you, our unitholders, for your support, past and present. We are committed to being proactive and pragmatic in our response to the situation we currently face. Although we will be challenged in the coming months, I'm confident that we are up to the challenge. Thank you.

Thank you, Mario and Rael. Your leadership during this uncertain time has been outstanding. Along with your management team, you quickly reoriented the organization to work remotely, ensuring our tenants could count on us and that the business continue to be managed effectively throughout. Strong position in which Choice finds itself amidst this crisis is a reflection not only of those actions, but also the strategy that you and your team have been thoughtful and disciplined in pursuing during recent years. On behalf of the Board, I'd like to share my appreciation for all of your efforts. I'd now like to move to the first item of business and submit the audited consolidated financial statements of Choice Properties together with the notes and auditor's report to the unitholders for the year ended December 31, 2019. These are included in the annual report, which was provided to unitholders and can also be retrieved from the Financial Reports section of the Choice Properties website or SEDAR. Doris, were there any questions or comments submitted in connection with the financial statements?

No, Galen, we have not received any questions related to this item.

Thank you, Doris. We'll now move to the nomination and election of trustees. A strong governance structure starts with the Board of Trustees. Your trustees are responsible for supervising Choice Properties management on behalf of unitholders. Our Board is committed to high standards of accountability, integrity and ethics and believes that these hallmarks of good governance are fundamental to our success and to safeguarding the long-term interest of our unitholders. Our Board plays an important role in overseeing Choice Properties' strategy, risk management processes and leadership development. The Board also carries out several important duties directly and through its committees, including evaluating Choice Properties' internal controls over financial reporting and overseeing executive compensation and succession planning. This Board is well-qualified to carry out its mandate with extensive leadership experience and strong strategic acumen. Those traits are complemented by further qualifications and expertise in real estate, risk management, finance and strategy. Our management proxy circular contains detailed biographies, setting out the valuable qualifications and diverse backgrounds of the trustee nominees proposed. Eight trustees are to be elected. I'm pleased to report that based on the proxies received by the scrutineer in advance of the meeting, each trustee nominated received votes in favor from at least 95% of votes cast. We will now consider the election of trustees. To facilitate the introduction of nominees, we refer you to the slide on the webcast. I declare the polls open on all resolutions. Doris, were there any questions or comments submitted in connection with the nomination and election of trustees?

No, Galen, we've not received any questions related to this item.

Thank you. As mentioned, I've taken the liberty of asking certain unitholders to make the motions for the election of trustees and other motions today. Could I please have a nomination for the election of trustees?

My name is [ Vanessa Leon ], and I'm a unitholder. Mr. Chairman, I nominate the following persons for election as Trustees of Choice Properties to hold office until the next Annual Meeting of Unitholders or until their successors are duly elected or appointed: Kerry D. Adams; Christie J.B. Clark; Graeme M. Eadie; Karen Kinsley; R. Michael Latimer; Nancy H.O. Lockhart; Dale R. Ponder; Galen G. Weston.

My name is [ Patricia Rufic ], and I am a unitholder. Mr. Chairman, I second the motion.

Thank you. Choice Properties' Declaration of Trust requires that nominations of trustees by unitholders be received by the trustees at least 30 days in advance of the meeting in order to be valid. As no further nominations were received prior to the deadline, the nominations are closed. If there are no further nominations, I call on [ Vanessa ] to move that the nominations be closed.

Mr. Chairman, I move that nominations be closed.

Mr. Chairman, I second the motion.

Thank you. You have now heard the motion. I will ask unitholders for their appointees to cast their votes through the online portal. As a reminder, if you have already voted or sent in your proxy, there is no need to do anything unless you wish to change your vote. [Voting]

Thank you for casting your votes. The scrutineers will tabulate the votes cast, and we will report on the results towards the end of the meeting. We will now move to the appointment of the auditor, the next item of business. Doris, were there any questions or comments submitted in connection with the appointment of auditor?

No, Galen. We have not received any questions or comments related to this item.

Thank you. I'll now entertain a motion for the reappointment of the auditor of Choice Properties and the authorization of trustees to fix the auditor's remuneration.

Mr. Chairman, I move that KPMG LLP chartered professional accountants be reappointed auditors of Choice Properties until the next Annual Meeting of Unitholders of Choice Properties and that the trustees be authorized to fix the auditors' remuneration for the 2020 fiscal year.

Mr. Chairman, I second the motion.

Thank you. You've now heard the motion. If you have not already done so, I will ask unitholders or their appointees to cast their votes through the online portal. [Voting]

Thank you for casting your votes. Scrutineers will tabulate the votes cast, and we will report on the results towards the end of the meeting. The next item of business is the advisory resolution regarding Choice Properties' approach to executive compensation. The resolution is more fully described on Page 19 of Choices Properties management proxy circular. Doris, were there any questions or comments submitted in connection with this matter?

No, Galen, we've not received any questions or comments related to this item.

Thank you. I'll now entertain a motion to approve, on an advisory basis, Choice Properties' approach to executive compensation.

Mr. Chairman, I move that the advisory resolution regarding Choice Properties' approach to executive compensation as more fully described on Page 19 of the management proxy circular be approved.

Mr. Chairman, I second the motion.

You have heard the motion. If you have not already done so, I will ask unitholders or their appointed proxies to cast their votes through the online portal. [Voting]

This brings us to the end of voting on items of business before this meeting, and I therefore declare the polls closed. Thank you for casting your votes. The scrutineers will tabulate the votes cast, and we will report back at the end of the meeting.

Galen, I wish to advise you that we have not received any general questions in relation to this meeting.

Thanks. Okay. Maybe we'll just wait 1 minute and see if anybody has any questions now that we're at the question-and-answer period. Okay. There are no questions, and there are no more questions. And I'm pleased to report we have now received the voting results by the scrutineer on the 3 items of business. On the election of trustees, the voting results show that each trustee nominee has received votes in favor from at least 95% of votes cast. Accordingly, I declare that the proposed trustee nominees have been duly elected as trustees of Choice Properties to hold office until the next annual meeting of shareholders or until they resign or their successors are duly elected or appointed. On the appointment of auditors, the voting results show that approximately 99% of votes cast were in favor of the reappointment of KPMG LLP chartered professional accountants as the auditors of Choice properties. I declare that KPMG LLP chartered professional accountants are reappointed auditors of Choice Properties and that the trustees are authorized to fix the auditors' remuneration. On the advisory vote on Choice Properties approach to executive compensation, approximately 88% of the votes cast were voted in favor of Choice Properties' approach to executive compensation. I declare this motion to be passed. The final voting results will be available after the meeting and posted to Choice Properties SEDAR profile at www.sedar.com. Before requesting a motion to terminate the meeting, I wanted to conclude by reiterating the sentiments of Rael and Mario. Choice Properties remains strong through this crisis, even stronger than it would have been due to the long-term strategic decisions taken by the company in 2019. As a Board, we look forward to a post pandemic world where we are confident your company will continue to prosper. As there is no further business, can I have a motion to terminate the meeting?

Mr. Chairman, I move that the meeting terminate.

Mr. Chairman, I second the motion.

Thank you. I'll now declare the meeting terminated. On behalf of Choice Properties, I'd like to thank you for taking the time to join us online or over the telephone today. Thank you.

You may now disconnect.