Morguard Real Estate Investment Trust (MRTUN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to Morguard REIT's conference call. [Operator Instructions]. This call is being recorded on Thursday, April 28, 2022. I would now like to turn the conference over to Andrew Tamlin. Please go ahead.

Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's First Quarter 2022 Earnings Conference Call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Vice President of Western Asset Management; along with Tullio Capulli, Vice President of Eastern Asset Management. 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 first quarter 2022 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 would make on this call. Overall, we were pleased with the first quarter results, which showed improved same asset metrics over the first quarter of 2021. Net operating income for the quarter declined to $28.5 million in 2022 from $31.1 million in 2021. However, the decline was due to the $2.3 million in nonrecurring lease cancellation fees recorded last year from Lowe's at Pine Centre in order to help facilitate Save-on-Foods deal. FFO decreased to $15 million in 2022 from $19.3 million last year due to the recording of $4.3 million in nonrecurring items in 2021, which includes the lease cancellation fees and also includes $2 million in Sears settlement funds collected last year. After considering the nonrecurring items from a year ago, this year's results are very comparable. Same asset net operating income across all asset classes for the first quarter improved once again from a year ago. A decline in the same asset single-tenant office class is attributed to a onetime bad debt recovery recorded last year. Same asset net operating income for the enclosed malls segment improved a healthy 12% over last year. We have seen continued declines in interest expense, which declined another $300,000 this quarter due primarily due to the decline in debt on a year-over-year basis. Turning to operations. We are seeing growth in traffic and sales numbers at our Western enclosed malls, which are not as susceptible to lockdowns and are also typically the premier mall in their catchment area. It is still a challenging environment for our 2 Ontario enclosed malls, which have been susceptible to the lockdowns over the last couple of years. Rent collections are, for the most part, back to normal with the exception of the 2 Ontario enclosed malls, which have been running recently at approximately 95%. We did see a pause in being able to continue the trend of resolving outstanding receivable issues due to the Omicron variant from earlier in the quarter. Consequently, our net receivable balance remains relatively unchanged at approximately $4 million from Europe. We expect to continue to make progress on these amounts as we move forward into the year. A sizable portion of this balance relates to accounts from the 2 Ontario enclosed malls. The REIT's PCME or operating capital reserve was established to be $6.3 million for the quarter or $25 million annually, which is back to our normal levels pre-COVID. We spent only $2.6 million of the reserve, mainly due to the fact that we typically spend less capital dollars in the first quarter as compared to other quarters. The trust is continuing with the Save-on-Foods development job at Pine Centre, which entails the retenanting of the empty Lowe's premises into a new 38,850-square-foot Save-on-Foods grocery store. Demolition of the existing former Lowe's premises is now complete, and we are arranging for sub-trades and materials deliveries. This is expected to be completed in Q1 2023. The addition of grocery further complements the strong anchor tenant profile at this mall and has advanced leasing discussions with some discriminatory tenants looking to come into this marketplace. Our overall occupancy levels at March 31, 2022, are slightly higher than both year-end and a year ago. Our current occupancy level for all asset classes of 91% has only changed slightly from the start of the pandemic, which was 93%. This speaks to the fact that in most cases, we've been able to keep our tenancy at our assets. And now for a quick update on our leasing efforts. At this point, 1/3 of the remaining 337,000 retail GLA coming due this year represents anchor tenants, which are all expected to renew or have renewed. Further, the vast majority of the remaining expiring space is expected to renew. Further, more than half of the 270,000 office GLA coming up for renewal in 2022 represents government tenants, which have already renewed or are expected to renew. Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal on December 31, 2020, and is now an overhaul for the second year. While they have verbally told us that they expect to renew, they have unfortunately still been focused on the response to the pandemic, which has taken priority. At this point, there is no change in the situation and we're looking at later in 2022 in order to get this completed. Turning to finance and liquidity. The trust is in a strong liquidity position with $175 million in liquidity at the end of the quarter and $322 million in unencumbered assets. Wrapping up, we are optimistic that continued increases in traffic and sales that are in closed malls will facilitate further growth in this asset class. Further, we're encouraged by the desire of businesses to bring their employees back to the office, either on a full-time basis or on some type of hybrid model. We believe this will lead to additional long-term commitments by office tenants in the near future. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have shown resilience in collections. Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continuing and execute our strategy, and thank you for your continued support. We will now open the floor to questions.

[Operator Instructions] Your first question will be coming from Jonathan Kelcher with TD Securities.

First question, just on -- and that was pretty good color on the retail expiries. But I noticed that the month-to-month has ticked up, and it's now north of 400,000. Can you maybe give a little bit of color on that and how you expect it to trend? And maybe how that compares to what it would have been pre-COVID?

Jonathan, it's John Ginis responding. So typically in the enclosed mall format, what we see is rollover of leases from Christmas into the subsequent calendar year. This year has been a little bit different because Andrew in his comments noted that occupancy remains pretty good across the exposed retail mall portfolio. So we're transitioning out of the pandemic. We're obviously trying to evaluate options across our mall and every asset is different, regions are different. As, again, I go back to the comments, Andrew was saying with respect to how we see things are stronger. So we're getting a lot of demand for tenants looking for permanent solutions, whereas here in Ontario, it's a little bit more challenging because of the prolonged lockdowns that have been sued in this province. So to keep occupancy there, we are working with our incumbents in terms of short-term leases to roll them over as we identify solutions and hopefully, things get better.

Okay. So it would normally -- the month-to-month would normally tick up in Q1?

Tick up and then slowly regress with solutions M&A with respect to longer-term occupants that want to take space for longer durations in shopping centers, yes.

Okay, that's helpful. And then just on the fair value gains this quarter, can you maybe give a little bit of color on them? Was that more future expectations on cash flow? The cap rate didn't move all that significantly.

There is -- so there's a few tweaks to some of the cap rates, Jon, it might get lost in the overall numbers. The positive aspects were some office in Vancouver and a little bit of industrial and maybe 1 or 2 strips, so...

Okay. And then just lastly, what do you expect for bad debts over the balance of this year?

Barring any new variants, I think our bad debt expense is effectively normalized at this point. So you'll likely see a little bit of bad debt expense for the rest of the year, but certainly not to the levels that we saw in the first kind of year or so of the pandemic. So probably first quarter is as good of a place to start as any.

Kind of like $0.5 million a quarter?

Yes, maybe give or take.

[Operator Instructions] Your next question will be coming from Tom Callaghan from RBC Capital Markets.

Andrew, maybe just curious at a high level, if I take a step back, but interested in your thoughts around maybe 1 or 2 key priorities here for the business maybe over the next 12 months or so?

Well, I think we're anxious to get beyond the pandemic and get to a proper leasing market. So I think that's first and foremost, whether it's office or retail. I think there's been a lot of kind of stops and starts in relation to leasing conversations. So I think we're really looking forward to kind of getting a bit more confidence in that market and continuing on with those conversations. And I think that's really at the top of the list.

Great. That's good color. And then maybe shifting gears, just one last one for me. But on the lease cancellation fees this quarter, I think it was just over maybe $500,000. But just curious, did that relate to any one tenant in particular or more kind of a collection of smaller tenants?

Yes. Just more of a collection of smaller tenants.

Okay. Okay. And then looking ahead, is there anything kind of on your radar for the rest of the year or nothing kind of as of now?

Certainly nothing material or nonrecurring, like the $2.3 million that we had last year, nothing really close to that. So that was definitely an outlier.

There are no further questions at this time. Please go ahead.

Okay. Thank you for attending the call and look forward to talking to everybody next quarter. Thank you.

That concludes our conference call for today. You may now please disconnect your lines. Goodbye.