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

Good day, and thank you for standing by. Welcome to the Choice Properties Real Estate Investment Trust Annual Meeting of Unitholders. Please be advised that today's meeting is being recorded. I would now like to hand the conference over to your speaker today, Gordon Currie. Thank you. Please go ahead.

Good morning, and welcome to the 2023 Annual Meeting of Unitholders of Choice Properties Real Estate Investment Trust. I'm Gordon Currie and I serve as Chair of the Board of Trustees. It's my pleasure to welcome you to our Annual Meeting of Unitholders. Today's meeting is being held as a virtual meeting by way of a live webcast. Joining me this morning via webcast are Rael Diamond, our President and Chief Executive Officer; Mario Barrafato, our Chief Financial Officer; Ana Radic, our Chief Operating Officer; and Simone Cole, our Vice President, General Counsel and Secretary. Several other members of the Board of Trustees and senior management are also attending remotely. I would now like to call to order this annual meeting of unitholders. I will begin today's meeting by outlining how voting and questions will be addressed. Voting during today's meeting will be conducted through the online platform. When we are ready to table an item of business for a vote, you will see voting options appear on your screen. Usually and this year is no exception. The majority of unitholders have submitted their proxies or voting instructions in advance of the meeting. If you have voted in advance of the meeting by submitting a proxy and do not wish to revoke your vote then you do not need to do anything. The scrutineers will tabulate all the votes cast during the meeting and we will report on the results of each resolution at the end of the day. To submit a question, click on the messaging icon on the top of your 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. Simone Cole, our Corporate Secretary, will read the questions allowed when requested. And either I or a member of the management team will respond. If you are logged into this virtual meeting as a guest, you will not be able to ask a question as only registered unitholders and duly registered proxy holders may do so. I will now proceed with the formal part of the meeting. I would ask Simone Cole, the Secretary of Choice Properties, to act as Secretary of the meeting. TSX Trust Company is acting as scrutineer of the meeting by way of its representatives, Nicole Silvera and Lori Grinton. Only unitholders of record at the close of business on March 13, 2023, 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 motions, which are called for in the notice of meeting. A copy of the notice of meeting and proof of its mailing have been filed with the records of this meeting. 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 begin with remarks from the Choice Properties management team. These will be followed by the submission of the 2022 annual financial statements followed by 3 resolutions: first, to elect the Board of Trustees; second, to appoint Choice Properties external auditor for fiscal 2023 and to authorize the trustees to fix the external auditor's remuneration; and third, to consider an advisory resolution on Choice Properties' approach to executive compensation. At the conclusion of the formal items of business, we will move to our general question-and-answer period and the announcement of voting results. I would now like to bring your attention to the notice appearing on the screen. On behalf of those speaking today, I would like to note that today's remarks may include forward-looking statements and references to non-GAAP financial measures. Actual results could differ materially from the forecast, projections and conclusions in the forward-looking statements. Details regarding forward-looking statements and non-GAAP measures can be found in Choice Properties 2022 annual report as updated in the 2023 1st quarter report to unitholders. I should also note that during the meeting, we may pause from time to time to review messages from the Corporate Secretary. Thank you for your patience as we do so. Before I hand things over to Rael, I'd like to take a moment to reflect on 2022 and to acknowledge the efforts of the team at Choice Properties over the last year. 2022 was another year of positive momentum for our business as we significantly advanced our strategic agenda, continued to demonstrate the stability of our portfolio and strength of our balance sheet, made meaningful progress on our transformational development pipeline and adopted ambitious yet achievable targets in relation to our ESG program, including the adoption of science-based targets to reduce greenhouse gas emissions by 2050. Your Board is pleased with 2022 despite the very real economic challenges still facing all of us, I am confident in the team at Choice Properties and look forward to building on our positive momentum this year. I would now like to call upon Rael, Mario and Ana to present an update on the business.

Thank you, Gordon. Good morning, everyone. Mario, Ana and I are pleased to welcome you to our 2023 Annual Meeting. We always welcome the opportunity to engage with you, our unitholders. As Gordon mentioned, 2022 was another year of positive momentum for our business. At Choice Properties, we aim to create enduring value through the ownership, operation and development of high-quality commercial and residential properties. We believe that value comes from creating spaces and improve how our tenants and communities come together to live, work and connect. To do this, we continue to follow our proven strategic framework, which drives stability and growth for you, our unitholders. We remain focused on 3 crucial financial goals: first, preserving our capital. Second, generating stable and growing cash flow; and third, achieving net asset value appreciation and distribution growth over time. Financial success for us means meeting these objectives of a long-term investment horizon. This is achieved by focusing on 3 key business priorities. Our first priority is to maintain a market-leading portfolio. As Canada's largest REIT, we have an exceptional portfolio of over 700 income-producing properties, totaling approximately 64 million square feet of leasable area. To ensure that our portfolio delivers over the long term, we will continue to actively manage our assets and capitalize on opportunities to recycle assets that won't meet our financial goals. Our second priority is to sustain operational excellence. We have a proven operating platform and our team is focused on delivering exceptional service to our tenants and managing our assets to the highest standard. Our third priority is to deliver on our development pipeline. Development is one of the most significant opportunities for long-term net asset value growth. Through development we aim to add high-quality assets or portfolio and to expand and diversify our tenant base. Our 3 priorities are supported by an unmatched foundation. Our foundation provides us with a competitive advantage and consists of the following. Firstly, our strategic relationship with Loblaw, Canada's largest retailer, provides stability and unique value creation opportunities to our business. Secondly, we have an industry-leading balance sheet. Our balance sheet, coupled with a conservative and disciplined approach to financial management provides us with the flexibility to capitalize on market opportunities and fund our development pipeline. Thirdly, we are committed to lead, by example, in ESG, we prioritize environmental and social sustainability practices and governance oversight in all aspects of our business. This supports our objective of sustaining operational excellence. And finally, we have an experienced, diverse and engaged team of real estate professionals. In everything we do, we are grounded by our core values of care, ownership, respect and excellence. Simply put, we do think -- we do the right things and we do things right. The part of our strategic framework was once again demonstrated by 2022 achievements. We delivered stable and consistent unitholder returns driven by the strength and resiliency of our market-leading portfolio. We continue to enhance the overall quality of our portfolio through our capital recycling program. In 2022, we completed over $1.2 billion of real estate transactions. This included the disposition of over $800 million of office properties. Last year, we made the strategic decision to exit the office asset class as we wanted to focus our time and capital on the opportunities available in our core business of essential retail industrial and our robust development pipeline. This decision manifested itself in the sale of 6 high-quality office properties to Allied Properties REIT for approximately $734 million. To date, we've successfully disposed or under contract to dispose of 11 -- 10 of our 11 noncore office properties. Our portfolio today consists of 3 strategic asset classes, each with its own set of exceptional fundamentals to support long-term value creation. In addition to enhancing our portfolio quality, we made significant advancements on our development pipeline demonstrating our team's ability to execute on our plan and create value. Mario will speak to some of these achievements shortly. In 2022, our team also demonstrated our commitment to sustainability by making significant advancements in both our ESG [indiscernible] fighting climate change and advancing social equity. Ana will take you through a few more of our achievements in this area shortly. Finally, in an uncertain economic environment, we focus on ensuring we maintain liquidity and prioritize maintaining our industry-leading balance sheet. All that we've achieved this past year could not have been done without the dedication, collaboration and diverse talent demonstrated by our colleagues every day with a team of disciplined individuals with a track record of success. We are focused on building relationships with our tenants, business partners and with one another. We are proud of what we have accomplished and what's to come. I'll now pass it over to Ana, who will speaking to our existing portfolio and operations, along with our commitment to embedding ESG throughout our business.

Thanks, Rael. As Rael mentioned, Choice is Canada's largest REIT with over 700 properties and 66 million square feet across the country, we own real estate where tenants want to be and where Canadians live and work. Our national footprint supported by the deep regional knowledge of our team continues to be a competitive advantage. We ended 2022 with 98% occupancy, reflecting our high-quality tenant base and the strength of our operating platform and portfolio. Across our portfolio, we benefit from our relationship and long-term leases with Loblaw, one of Canada's leading retailers. This strategic and collaborative relationship provides us with stability and growth opportunities with Loblaw, Shoppers Drug Mart and other members of the Loblaw Group of companies. Our necessity-based retail portfolio is the largest and most resilient in Canada. As of the end of 2022, we had 574 retail properties consisting of 44.2 million square feet and a fair value of $10.7 billion. It is clear that we are the market leader when it comes to essential retail. Our retail neighborhood centers are 97.8% occupied, located in key areas and primarily leased to necessity-based tenants, including grocery, pharmacy, pet medical services and discount retailers to name a few. These type of tenancies provide reliable and growing cash flow. Our growing $3.5 billion industrial platform includes 116 properties totaling 17.4 million square feet. Our portfolio is centered around generic distribution facilities in key distribution markets across Canada, where the demand is highest. In these markets, we are building critical mass in order to meet the changing needs of tenants. Our strong industrial footprint has attracted a resilient tenant base. Our excellent working relationship with these tenants and our large portfolio of well-located functional spaces provides a stable foundation for future growth. Lastly, our mixed-use and residential platform is a small but growing part of our overall portfolio. This 2.3 million square foot portfolio includes both newly developed purpose-built rental buildings and residential-focused mixed-use community. They are trended accessible and located in Canada's largest cities. The Brixton and Liberty House are our 2 newest residential properties. They are both located in Toronto and are now stabilized. We will continue to invest in this growing asset class over time. We have an exceptional team focused on maintaining our market-leading position and sustaining operational excellence. Our property management teams provide best-in-class service and operate our properties to a first-class standard. Our leasing teams build meaningful long-term relationships with our tenants and the brokerage community. Our asset management team has ownership of property level strategy and identified ways to increase financial performance. In 2022, we set the stage for the first phase of our ESG program with key advancements towards fighting climate change and advancing social equity. Last year, in addition to becoming one of the first entities in Canada to have our net zero targets validated by the science-based targets initiative, we certified over 160 properties under LEED or BOMA BEST developed green lease clauses across our retail and industrial assets, promote energy efficiency, renewable energy and low carbon design identified opportunities to reduce embedded carbon across retail, industrial and residential building types, dominated over $625,000 and 1,240 hours of colleague time to Canadian charities in support of the powering children and low-income community. Became a founding member of the Accelerating Accessibility Coalition focused on integrating the needs of Canadians living with disabilities into real estate design and construction. We were named one of Greater Toronto's top employers in recognition of the efforts that we have put into creating the best workplace for our colleagues and achieved the women lead here benchmark, demonstrating significant representation of self-identified women in leadership positions at Choice Properties. Choice Properties is one of Canada's largest landlords. As such, we have an important role to play in preventing the effects of climate change and in shaping our communities to be as inclusive and sustainable as possible. While we are proud of our ESG achievements to date, we recognize there is much more we need to do. In our upcoming 2022 ESG report, which will be released this week, we have outlined both the substantial progress we have made in 2022 and the enhanced ambitious targets we have set. I will now turn the floor over to Mario to provide an update on the advancements in our transformational development pipeline and on the actions we have taken to maintain our financial position.

Thank you, Ana. Our development program continues to provide us with the exceptional opportunity to add high-quality real estate to our portfolio at a reasonable cost. Over the past few years, we've made the growth of our development platform, a high priority and 2022 was no exception. We ended the year with 18 active development projects with a total investment of approximately $400 million. On completion of these developments, we will add 1.9 million square feet of new GLA to our portfolio. Equally important, we've achieved several key zoning milestones at our future industrial and mixed-use and residential development sites. In our industrial development pipeline, we achieved zoning at 2 sites in the Greater [ Tower ] area for over 6 million square feet at our share. This brought our total industrial development pipeline to over 7 million square feet. When completed, this will increase the size of our industrial portfolio by 40%. Currently, we have 3 active development projects located in the GTA, Vancouver and Edmonton that are expected to deliver 1.4 million square feet of new generation logistics space by the end of the year. Our development team is actively working on planning of the remaining 5.6 million square feet of future industrial space at our 2 sites in the GTA. Turning to our active mixed-use and residential development pipeline. In 2022, we continue to advance projects that will expand our footprint in the residential -- the rental residential market. We have 2 ongoing projects located in Brampton and Ottawa, Ontario which are expected to be completed in the second half of 2023. Beyond our active development projects, we have a substantial pipeline of larger, more complex mixed-use developments with 12 projects representing over 10.4 million square feet in different stages of rezoning and planning process. Combined, we have a transformational development pipeline of over 18 million square feet which will drive meaningful net asset value growth in the future. And next, I'd like to take some time and review our 2022 financial performance. Last year, we delivered strong financial results and continue to manage risk through a disciplined approach to financial management. We took actions to maintain our industry-leading balance sheet by securing long-term financing at a reasonable cost despite pressures from rising inflation and interest rates. Our performance in '22 demonstrated our ability to deliver on the financial goals we'll refer to. We continue to ensure that we have a conservative capital structure, focused on stability and safeguards in place to ensure we're able to deliver in any economic environment; and lastly, the capacity to support growth. Some of the financial highlights for 2022 include strong period-end occupancy at 97.8%, with retail and industrial operating at near full occupancy. In a volatile economic environment, we delivered solid funds from operations of $0.964 per unit an increase of 1% compared to 2021 and an increase in same asset cash NOI by 3.8% over the prior year, primarily due to increased revenue from a combination of higher rental rates, higher occupancy in both retail and industrial portfolios, contractual rent escalations and higher cost recoveries. We maintained strong debt metrics with a debt-to-EBITDA ratio of 7.5x and liquidity of $1.2 billion. And we delivered 3.6% growth in net asset value, driven by the strength of our industrial portfolio and the progress in our developments. Overall, our business model stable tenant base, strong balance sheet and disciplined approach to financial management have allowed us to deliver superior returns even during times of volatility, including a pandemic and rising inflation. It has also set the foundation for our first distribution increase since 2017, which we're pleased to announce this past quarter and positions us well to continue to deliver strong risk-adjusted returns into the future. I would now like to invite Rael back to deliver closing remarks.

Ana and Mario, thank you for sharing your updates. As we look ahead, we will continue to deliver on our strategic framework. Our business is strong, and our priorities remain unchanged. Our key focus areas are reflective of who we are and where we are going. Our national footprint and regional focus sets us apart are tenants of the highest quality and our relationships with them are strong. Our portfolio is market leading, and our operating platform is set up to ensure we maintain this position and drive operational excellence. Our portfolio consists of 3 strategic asset classes, each with its own set of exceptional fundamentals to support delivering on our goals. Our retail portfolio is located at key intersections in communities across the country where Canadians live and work. Our industrial footprint is in the right markets and has significant embedded growth. Our mixed-use and residential platform is well located and positioned to provide inflation protected growth. We will deliver on our development pipeline in the near, medium and long term. They have a competitive advantage with the ability to develop across each of our asset classes, providing us with flexibility to adapt to market trends. We will continue to improve portfolio quality and drive growth through our retail intensification. With our existing properties and a 7 million square foot pipeline, we aim to create one of the largest industrial portfolios in Canada. Our mixed-use and residential development pipeline with over 80 sites means we already have the land and the ability to continue to drive NAV growth over a long-term horizon. And supporting all of this, we have an unmatched foundation including our industry-leading balance sheet that provides stability and the latitude to pursue growth opportunities without putting the business or your distribution at risk. As we reflect on where Choice is today, our fundamentals are stronger than ever. We have a proven strategy to maximize the value of our portfolio and create enduring value for all our stakeholders well into the future. We are proud of what we've accomplished and what's to come. We look forward to building on our positive momentum in 2023. On behalf of the entire Choice Properties team, we thank you our unitholders for your continued support and confidence. I'd like to welcome Gordon back to address the meeting. Thank you.

Thank you, Rael, Ana and Mario. I would now like to move to the first item of business and submit the annual audited consolidated financial statements of Choice Properties, together with the notes and auditor's report to the unitholders for the year ended December 31, 2022. These are included in the annual report which was provided to unitholders and can also be retrieved from the Financial Reports section of Choice Properties website or from SEDAR. Simone, were there any questions or comments submitted in connection with this item?

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

Thanks, Simone. We will now move to the 3 matters to be voted upon at this meeting. Before moving to the nomination and election of trustees, I'd like to take this opportunity to thank a trustee, who is not standing for reelection this year. Chris Clark is retiring from the Board after having served as a trustee of Choice Properties since its inception in 2013. Over the last 10 years, we have been lucky to have benefited from his expertise and guidance. On behalf of the Board and the entire management team, I would like to thank Chris for his dedicated service to Choice Properties. We also have 3 new trustee nominees standing for election today. Diane Kazarian joined our Board last year and is standing for election at the meeting today. Diane has deep expertise in business, finance, accounting and executive leadership and she will continue to be an excellent complement to our Board. The Board has also identified Qi Tang and Rael Diamond, our President and CEO, has trustee nominees. Both Qi and Rael will strengthen and complement the current skills and capabilities of the Board by bringing expertise in real estate, finance, strategy and executive leadership. We look forward to their many contributions to Choice Properties. There are 11 nominees standing for election at this meeting. Our management proxy circular contains detailed biographies, setting out the qualifications and backgrounds of each of the nominees. I am pleased to report that based on proxies received by the scrutineer in advance of the meeting, each trustee nominee received votes in favor from at least 98% of votes cast. To facilitate the introduction of the nominees, I refer you to the slide on the webcast. I now declare the polls open on all resolutions. Simone, were there any questions or comments submitted in connection with the nomination and election of trustees?

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

Thank you. I've taken the liberty of asking certain unitholders to make the motions for the matters to be voted on today. Can I please have a motion a nomination for the election of trustees.

My name is Kim McConnell and I am 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 they resign or their successors are duly elected or appointed. L. Jay Cross; Gordon A.M. Currie, Rael L. Diamond, Graeme M. Eadie, Diane Kazarian, Karen Kinsley, R. Michael Latimer, Nancy H.O. Lockhart; Dale R. Ponder, Qi Tang, Cornell Wright.

My name is Lisa Kosowicz, and I'm a unitholder. Mr. Chairman, I second the motion.

Thank you, Kim and Lisa. 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. Kim, could you move a motion to that effect?

Mr. Chairman, I move that nominations be closed.

Mr. Chairman, I second the motion.

Thank you. If you have not already done so, I will ask unitholders or 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. We'll now move to the appointment of the auditor and the authorization of the trustees to fix the auditor's remuneration. Simone, were there any questions or comments submitted in connection with the appointment of the auditors?

No, Gord. We have not received any questions related to this item.

Thank you, Simone. I will now entertain a motion for the appointment of the auditors and the appointment of the trustees to fix their remuneration.

Mr. Chairman, I move that PricewaterhouseCoopers LLP be appointed auditor of Choice Properties until the next Annual Meeting of Unitholders of Choice Properties and that the trustees be authorized to fix the auditor's remuneration for the 2023 fiscal year.

Mr. Chairman, I second the motion.

Thank you. If you have not already done so, I would ask unitholders or their appointees to cast their votes through the online portal. The next item of business is the advisory resolution regarding Choice Properties' approach to executive compensation. The resolution is more fully described on Pages 20 and 21 of Choice Properties Management Proxy Circular. Simone, were there any questions or comments submitted in connection with the advisory resolution?

No, Gord. We have not received any questions related to this item.

Thanks, Simone. 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 be approved.

Mr. Chairman, I second the motion.

Thank you. And once again, if you have not already done so, I would ask unitholders or their appointees to cast their votes through the online portal. This brings us to the end of the items of business before this meeting. I therefore declare the polls closed. Thank you for casting your votes. The scrutineers will tabulate the votes cast, and we will report on the results at the end of the meeting. I would now like to open the meeting for any general questions. As a reminder to submit a question, click on the messaging icon at the top of your computer screen. We will make every effort to answer all questions. However, in the interest of time we will limit the question and answer period to 20 minutes. Any unanswered questions will be addressed after the meeting by members of our management team. Simone are there any questions? [Voting]

Gord, we have not received any questions.

Just wait another minute to see if any questions come through. Seeing none. Simone, have we received the preliminary voting results from the scrutineer on the 3 items of business.

We have the preliminary results.

Thank you. On the election of trustees, the voting results show that each trustee nominee received votes in favor from at least 98% of the votes cast. Accordingly, I declare that the proposed trustee nominees have been duly elected to hold office until the next annual meeting of unitholders or until they resign or their successors are duly elected or appointed. On the appointment of the auditor, the voting results show that approximately 99% of the votes cast were in favor of the appointment of PwC as the auditor of Choice Properties. I declare that PwC is appointed the auditor of Choice Properties and that the trustees are authorized to fix their remuneration for the 2023 fiscal year. And finally, on the advisory vote on Choice Properties' approach to executive compensation, approximately 97% 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. As there is no further business, may I have a motion to terminate the meeting.

Mr. Chairman, I move that the meeting terminate.

Mr. Chairman, I second the motion.

I now declare the meeting terminated. On behalf of the Board and the management team, I would like to thank you for taking the time today to join us.

This concludes today's meeting. You may now disconnect.