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

Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust 2026 Second Quarter Results Conference Call. [Operator Instructions]. This call is being recorded on Tuesday, July 30, 2020, I would now like to turn the conference to revert to Andrew Tamlin, our Chief Executive Officer. 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 Second Quarter 2026 Earnings Conference Call. I am joined this afternoon by John Ginis, Vice President of Retail Asset Management; Tom Johnston, Senior VP of Western Office Salat Management and Todd Febbo, Senior VP, Office Asset Management of Eastern Canada. 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 2026 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 comments that we make on this call. Our second quarter results have exceeded expectations and reflect solid combined same asset growth of 7.5% for the quarter. We continue to see a rebound in our office results our retail results have continued to produce solid growth in the resilient sector. The REIT's net operating income for the second quarter was $27.1 million, which was up 5.5% from $25.7 million in 2025. Year-to-date, 2026 net operating income was up 2.5% over 2025, while our office results include a couple of large vacancies in 2 of our Ottawa and Vancouver assets, we continue to reflect the increased demand for office space as companies continue to return to work options. There also continues to be solid growth in our Penn West Plaza results as we move past the initial period of 2025 inducements provided for the lease-up of this building. Penn West Plaza's NOI grew $1.2 million in the second quarter and remains at approximately 80% occupancy. As mentioned, our office net operating income includes a decrease of 84,000 square feet in the space that was returned to the landlord and 2 separate occasions at the beginning of the year. We believe these 2 vacancies will be short term in nature as both buildings are well located and favorable in-demand urban areas. All of our other individual office assets are seen either similar or improved occupancy from a year ago and is consistent with the larger trend of companies imposing back-to-the-office policies. From a retail perspective, we have had good success in continuing to add other quality retail tenants in the last 12 months throughout the portfolio. Further, positive leasing spreads throughout 2025 have also helped to improve the retail NOI into 2026. Our community strip portfolio continues to produce solid same-store growth of 5.9% for the quarter and 2.4% year-to-date and are effectively operating at 100% occupancy. Our imposed malls have seen improved same asset growth of 2.5% for the quarter and 3% year-to-date. Looking at the remainder of 2026, we do expect our retail results to remain stable. While we are working through the missing Bay income, we are still seeing positive retail fundamentals. Further, we are working out some retail developments, which I will touch on in a few minutes. Both traffic and sales per square foot numbers in our portfolio have been solid. Turning to financing and liquidity. The trust is $61 million in liquidity at the end of the quarter, which is unchanged from Q1 and down slightly from $68 million at the end of 2025. The trust is also $219 million in unencumbered assets, along with some up-financing opportunities into 2026 and 2027. The trust's interest expense declined $240,000 in the second quarter of 2026 over 2025 and mainly due to some lower interest rates on mortgage renewals and short-term interest rates. During 2026, the Trust has renewed for mortgages totaling $103 million with a slightly higher average rate upon renewal. The trust has approximately 22% of its debt is variable at the end of the quarter, which has increased slightly from 21% at the end of the year. We do expect to see an opportunity for additional up-financing in 2026 as we are currently in discussions with lenders about some upcoming mortgage renewals. In general, we have seen the lending market open up more in the last couple of years with lower spreads, especially on attractive assets, along with lenders being more open to looking at office finance opportunities. As mentioned in past quarters, the Trust's operating capital reserve has been established to be $35 million in 2026, which is unchanged from 2025. This equates to $17.5 million for the 6 months year-to-date. Actual cash spent for the quarter amounted to only $11.4 million which is typical to have slower capital spending during the first half of the year. We do expect to spend the full amount of the reserve by the end of the year, though. Our overall occupancy level of 85.2% at the end of the second quarter of 2026, has increased 40 basis points from 84.8% at the end of Q1. Retail occupancy has increased 60 basis points, and the office occupancy has increased 100 basis points since the first quarter. We continue to expect this percentage to rise in the coming quarters as additional leasing deals get bumped. We believe that the decline in industrial occupancy is temporary and will be reversing in the short term. Looking at the $764,000 and the remaining square feet that is coming up for renewal in the last 2 quarters of 2026, we feel good about the vast majority of this space. For tenant renewals greater than 10,000 square feet, there is only 1 small tenant that is at risk of not renewing. Looking quickly at 2027 for the same kind of threshold -- it is a similar story with only a couple of smaller office industrial think tenants that are at risk, none of which will be overly impacted. As mentioned in past quarters, we are now embarking a strategic merchandising program for [ Sitara ], which will see the addition of some new nationally recognized brand names being added to the tenant roster along with expansion plans for other tenants of the existing rent roll. The current development spend in the amount of approximately $6 million to date includes build-outs for tenants such as Sephora and H&M. These are all now open, and we have received very positive reviews about their impact. We ultimately expect to spend in the range of $25 million to $30 million as we look to add more discriminating tenants and also look to activate the former Sears space at Samara. This work will also include the demolition of Homer Sears parking deck, which is no longer needed and has exceeded its useful life. We are now pleased to announce the following mix of tenants, which will be opening between now and the end of 2027. Currently, we are nearing completion of the new Unigold premises, which is 12,600 square feet and is scheduled to open early in 2027. We are also pleased to announce that the former Sears box will be retenanted and will include a new Sport Chek and split still. And Sport Chek is a relocation of an existing tenant and will be a great complement to split to who is opening a new entertainment option at San Run. This work has begun and both tenants are scheduled to open in approximately 1 year from now. The trust has also had 2 no frills grocery deals which have been undertaken. During the fourth quarter of 2025, a new no-frills grocery historical from at Parkland Mall in Red Deer, and we are now seeing the income for that space. The cost was $1.6 million and activated previously vacant space. We are quite pleased with the same outcome. There is also a new no-frills opening at the center in Saskatoon in early 2027, with a cost of approximately $5 million. The trust believes that both of these new popular grocery options will be strong additions to these malls. The Trust will also be retenanting the old TV Mark box at our Open Air retail asset in Artree. The new tenant will be a timer operator, and this will represent a combined spend of approximately $1.5 million and will be quite accretive to the income of the REIT 30 and 2027. Wrapping up, we continue to believe that there are strong fundamentals in the retail leasing environment and of the environment -- the office market is in full rebound mode. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have performed very steady. 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. And 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 the line of Jonathan Kelcher from TD Cowen.

Thanks. Good afternoon. First question, just on the Saint Laurants center. With, I guess, the new tenants and you're saying that's going well, how is -- how is that impacting your negotiations with other tenants on renewals and getting new tenants into some of the empty spaces there?

You mind taking that, John?

Sure. Thanks, Andrew, and thanks, Jon, for the question. So Simon Center has been a key center for the REIT on a Prometal perspective for an extended period of time. And as Andrew said in his opening remarks, we've initiated a remerchandising program over almost 1.5 years ago. And we are trying to target large national or international tenants to complement the roster that existed today. To directly answer your question in terms of how the retail community is receiving what we're doing. Productivity of the shopping center is up because foot traffic is up. And foot traffic is up about 10%, and in sales productivity from the small Baomin tenants is also up by approximately 10%. So it's all positive trending. And with respect to renewals clearly, and just goes back to, again, to Andrew's introductory remarks, we're seeing some really good positive leasing spreads with respect to all of our enclosed assets as the vast majority to say, but specifically St Laurent because, obviously, they see the value of the long-term benefits of reanchoring the shopping center. We still have a lot of work to do, but all of the conversations have been very progressive today.

Okay. That's helpful. In the MD&A, it talks about a 120,000 square foot renewal with a retail tenant at the same rate. Was that a contractual renewal rate?

Yes, it's wrong? Yes. Go ahead.

Yes, I think it was somebody that had an option. Yes, it was -- maybe we could look at that offline, Jonathan. .

Okay. Okay. And then the office renewal in BC next year, the $235,000, will there be any change in the rate there, either up or down?

What was the renewal rates on the DC asset, Tom?

So that's the 1 to 1.1.