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

Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Second Quarter Conference Call. [Operator Instructions] Today's call is being recorded, Thursday, July 28, 2022. And I would now like to turn the conference over to Mr. Andrew Tamlin, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT Second Quarter 2022 Earnings Conference Call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Senior Vice President of Asset and Property Management, Western Canada; Tullio Capulli, Senior Vice President, Asset Property Management and Leasing, Eastern Canada; along with Rai Sahi, Chief Executive Officer and Chairman of the Board. Thank you all for taking the time to join the call. Before we jump into the call, I would like to point out that our comments will mostly refer to the second quarter of 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 make on this call. Overall, we are pleased with the second quarter results, which showed continued improvement in same asset metrics over last year as well as the recording of $12.3 million in fair value gains across our asset portfolio, mainly driven by increases in asset values in our strip mall portfolio. Net operating income for the quarter increased to $29.7 million in 2022 from $29 million in 2021 due to continued improvements in our enclosed mall portfolio results. FFO for the quarter increased 8% to $16.2 million in 2022 from $15 million in 2021 due to the improved net operating income for the quarter as well as continued interest savings from a decline in debt of $43 million from a year ago. Same-asset net operating income for the second quarter improved 4% from a year ago, buoyed by a 15% increase in same-asset results for our enclosed mall portfolio. This represents the fifth quarter in a row where we've achieved improved same-asset results on a year-over-year basis. We have seen continued declines in interest expense, which declined another $300,000 this quarter and $600,000 for the 6 months due primarily to the decline in debt on a year-over-year basis. As mentioned, our enclosed mall results continue to rebound. This was mainly driven by our malls located in Western Canada, which have seen rebounds in traffic and sales, which has translated into increases in percentage rent and specialty leasing opportunities. We are also pleased to add opportunities of discriminating tenants, such as lululemon and Sephora at some of our Western Canadian locations. These additions are solid endorsements to both our tenant and customer base. We are still seeing challenges in our 2 Ontario malls due to the numerous lockdowns imposed by the province over the last few years. We are, however, heading the right direction and look forward to improved results as Ontario traffic and sales continue to rebound. Rent collections are, for the most part, back to normal, with the exception of the 2 Ontario enclosed malls that have been running recently at approximately 95%. The tenants that are struggling in Ontario continue to be personal service tenants and food court tenants. The rent arrears and deferrals continue to decline since December 31, 2021, although there is still further work to do. The receivable balance for tenants has decreased from $9.2 million at year-end, down to $7.6 million at the end of the second quarter. Most of the uncollected overdue amounts have been fully allowed for, but there is still cleanup needed to be documented, abatements to be granted, and the vast majority of these amounts are outstanding from Ontario malls. The REIT's PCME, or operating and leasing capital reserve, was established to be $25 million for the year, which is back to normal levels. We spent only $6.8 million of the $12.5 million 6-month allocation, but we do expect to be more active on the spending in the back half of the year, which is typical for us. Our overall occupancy levels of 91% at June 30 remained relatively unchanged to both year-end and a year ago. This compares favorably to the rate from the beginning of the pandemic, which was 93%. This speaks to the fact that, in most cases, we've been able to keep tenancy at our quality assets. And now for an update on our leasing efforts. For the rest of 2022, there's approximately 253,000 in retail GLA coming due. We feel good about the renewal of the vast majority of this space, with renewals already completed for any space over 10,000 in GLA. We also have approximately 212,000 in office GLA coming due over the next 6 months. Approximately 1/2 of this represents single-tenant government lease at Chancery in Vancouver. This has been renewed for 10 years, and moves from an expiring rate of $25 per foot to an average of $27.50 per foot over the 10 years. Leasing discussions for retail opportunities have definitely picked up over the last 6 months as tenants now have a better hand on how they will be operating. Office leasing discussions are still somewhat muted as tenants are still trying to figure out what their office needs will be like in the long term in a post-COVID world. 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. While they have verbally told us that they expect to renew, they have unfortunately still been focused on their response to the pandemic, which has taken priority. At this point, we are looking at later in 2022 in order to get this completed. Our experience is pretty similar to other landlords who have the provincial government as tenants. Turning to financing and liquidity. The trust has $165 million in liquidity at the end of the second quarter and $329 million in unencumbered assets. This liquidity position has increased from $142 million a year ago. It has been a pretty quiet time from a financing perspective over the first 6 months, but there are a few mortgage renewals we are working on that come due in the last 6 months of the year. We do expect a net paydown from these mortgages, but we do have ample liquidity to be able to handle this. We will have further line of sight on this when we get to the third quarter reporting cycle. The trust is continuing with the Save-On-Foods development job at Pine Centre, which entails the re-tenanting 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're arranging for sub-trades and material deliveries and starting construction. This is expected to be completed early next year. 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. Wrapping up, we are pleased that the resiliency of our assets and the improved results from our enclosed mall and retail segment. While there is still room to grow to get back to pre-COVID results, what we have seen in the last year has been positive. We are looking forward to continued positive leasing conversations for our assets, and most of our enclosed malls remain dominant in their geographical area. And our strip malls, which are largely grocery-anchored, have performed well in the pandemic. 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 to execute our strategy, and thank you for your continued support. We will now open the floor to questions.

[Operator Instructions] Your first question comes from Jonathan Kelcher of TD Securities.

First just a little clarification there, Andrew, on your comments. Did I hear correctly that you have 253,000 square feet of retail expiring over the balance of this year?

Yes, that's right.

Okay. So that exhibit you have in the MD&A that says 650 is -- so roughly 400,000 square feet is month-to-month? Is that how we should think about that?

Yes, there is a significant amount that's either month-to-month or specialty leasing, that sort of thing.

Okay. That's helpful. And secondly, just on the gain -- the IFRS gain you had on strip retail. What drove that? Was it higher cash flow assumptions or is it cap rate change? Or what drove that?

Yes, it was really some cap rate adjustments for that portfolio. And as our valuation department looked at comparables, they thought it was appropriate to do that.

Okay. And then just lastly, for -- I guess, for you, Rai. Just given the current discount, and we're starting to see more REITs do this, but what are your thoughts on an NCIB for Morguard REIT?

I think we still have NCIB there. So we'll take a look at it whether we would do -- we will use it or not.

Okay. So no real current plans and obviously, no plans to be aggressive with it?

Well, I wouldn't say no plans to be aggressive. Aggressive is just not a proper word. Like we are always looking at ongoing whether -- it depends on what becomes available.

Your next question comes from Tom Callaghan of RBC Capital.

Just to start. Just curious with respect to occupancy and just given some of the leasing commentary there that you made in your opening remarks, Andrew, just curious if you have a view as to where occupancy kind of may trend here over the next 6 months into year-end?

It's been very stable, Tom, over the last 2 years under COVID. So I really wouldn't expect too much in the way of changes of occupancy. As I mentioned, we've had pretty good -- we have pretty good line of sight to the major renewals coming up from a retail perspective. And a lot of the heavy lifting has been done already on the office as well. So I don't really expect too much in the way of changes.

Got it. Make sense. And then just one more from me. Maybe any commentary and trends you're seeing with respect to TIs and then particularly on the office front and how those may have evolved since the start of the year, if there's been really any movement from the tenant perspective and what they're looking for?

Yes. I don't know, Tullio, do you want to handle that? Or Tom? One of you?

Sure. Tullio here. Yes, I mean, the TIs are starting to creep up a little bit. It hasn't gone up that much at this point in time, but everybody is competing for a lower pool of tenants at this point until people figure out what they need and how much space they need, and we go from there. But we're -- we don't anticipate it to be huge, but we will be competitive with any deal that we think is appropriate to be done.

[Operator Instructions] Mr. Tamlin, there are no further questions from the phone line, sir. Please go ahead with your closing remarks.

Okay. Thank you, everyone, for joining the call, and look forward to seeing everybody next quarter. Thank you.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for participating and ask that you please disconnect your lines.