Plaza Retail REIT (PLZUN) Earnings Call Transcript & Summary

Good morning, and I would like to welcome everyone to the Plaza Retail REIT Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Mr. Michael Zakuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zakuta.

Thank you, operator. Good morning, and thank you for joining us on our Q4 2019 results conference call. We are legally obliged to tell you that today's discussion includes forward-looking statements. We'd like to caution you that such statements are based on management's assumptions and beliefs. Please refer to Plaza's public filings for discussion of these risk factors. We are very excited about our future prospects and our solid financial results of 2019. Our success was driven by accretive growth without diluting unitholders. These results were generated through improved operating metrics, new development and redevelopment projects across our geography. During 2019, Plaza realized outstanding returns from new development and redevelopment projects. We anticipate that this growth will continue into 2020 and beyond. During 2019, we recycled capital by selling noncore assets, the proceeds provided by funding -- provided funding for higher-yielding projects. We acquired low-cost capital to fund developments and redevelopments by placing a record amount of long-term mortgage financing at historically low interest rates. Plaza materially lowered its payout ratio as a result of FFO and AFFO growth. We continue to initiate joint venture projects with capital partners in order to preserve capital. Plaza's pipeline is robust. We foresee additional growth and opportunity for redevelopments, new development projects and acquisitions in 2020. We delivered 340,000 square feet of new product in 2019. We anticipate delivering a similar amount of new product this year. Plaza possesses strong leasing and development infrastructure that enables us to meet the needs of tenants. Our niche of value, necessity and specialty retail continues to perform. At the end of January, we attended the Whistler ICSC Convention. Our leasing team met with over 70 retailers or their brokers. The retailers present at the conference were there to pursue deals, and we see continuing demand for space in our market niche. Today's growth-oriented retailers are looking for space in open-air style properties. Our portfolio is made up of 93% open-air properties divided into 3 types: strip centers, 60% of our business; single-use retail, typically, a pharmacy or a Dollarama, 19% of our business; and QSRs, 7% of our business. Our leasing deal volume is solid, and we remain confident that these leasing activities will continue into 2020. We are very pleased with the traction that we are seeing for our core product and are confident that we continue to add properties to retailers who require a strong physical presence. During the last quarter, we continued to deliver new development space. For today's call, we've included some recent photos of new stores on our website. You can open the presentation by going to our website, www.plaza.ca, click on the Investor Relations section, then click on financial reports and scroll down to presentations and click on Q4 Analyst Conference Call, February 2020 photos. The first section of the presentation shows new stores that opened in the fourth quarter in our Galway project in St. John's Newfoundland; also shows a new pad in Grandby, Québec; followed by our new Movati in Mississauga, Ontario. The Q4 construction slide show projects under construction for Princess Auto, School of Rock and Michaels in Galway; PetSmart in New Minas, Nova Scotia; our new facade for our Quispamsis strip center; our new Milestones in Moncton, New Brunswick; the transformation of our Sept-Îles, Québec KFC into an SQDC, that' a Québec cannabis store; our transformation project in Brampton, Ontario; our Smiths Falls redevelopment; and our Timiskaming, Giant Tiger. We trust that this illustrates that retail is still very much alive and the growth opportunities are available to real estate entrepreneurs. We continue to see opportunities where others do not. We're very active in pursuing opportunities such as redevelopment of challenged enclosed malls, recycling obsolete retail buildings, new developments following demolition of existing building or buildings and new developments following land assemblies based on demand from growth-oriented retailers. We're also making a concentrated effort to extract more value from our existing portfolio and our current development projects, the sale or development of excess land. Plaza has the necessary capital to take advantage of acquisition and development opportunities. Our capital recycling and financing programs have allowed Plaza to fund its growth without dilution to unitholders. We are confident that we will continue to grow cash flow and net asset value across our geography as we develop and redevelop in high-quality and necessity-based retail projects. I will now turn the call over to Jim Drake, Plaza's CFO. Jim, you're on.

Thank you, Michael. Overall, our results for the quarter and year were very positive due to our proactive management and ongoing development program. Committed occupancy remained strong, ending the year at 96.3%. We leased 1.2 million square feet during the year across our entire portfolio and realized healthy spreads on renewals for our core product being open-air centers. Total reported NOI for 2019 was up approximately 14% over last year, with same asset NOI, excluding nonrecurring lease buyouts, up 2.6% for the quarter and 1.8% for the year. Also, excluding the impact of lease buyouts and other similar items, annual FFO and AFFO per unit were up 7.8% and 6.8%, respectively, resulting in our annual payout ratios dropping to 71% of FFO and 80% of AFFO. In addition, other income, which generally represents fees built to our partners on co-owned properties, including leasing, development and financing fees on properties under development or redevelopment is up notably over last year. This is important as this signals that the related rental revenue from these additional developments and redevelopments will follow shortly. Our development program delivered 178,000 square feet of new developments and redevelopments in 2019, resulting in $38 million of fair value transferred to income-producing properties. In addition, we delivered 51,000 square feet of new developments in our nonconsolidated portfolio and acquired a 50% interest in a property in Cambridge, Ontario at a cost of $13 million, adding 115,000 square feet of GLA. Under our capital recycling program, we sold $20 million of noncore properties in 2019, generating $12 million of net proceeds. These proceeds were reinvested in higher-yielding opportunities, including our redevelopment program. On fair value, we recorded an $18.7 million gain on investment properties for the year, much of this increase was due to cap rate compression, including higher values from third party appraisals. We completed a major financing program in 2019, where we refinanced or placed new mortgages, locked in historically low rates for long terms and generated capital for our business. During the year, we closed on $200 million at 100% of long-term financing for longer terms in amorts and generally lower interest rates. This program generated $34 million of cash for Plaza, which has been used to reduce our operating line, thereby reducing operating line interest going forward and increasing liquidity. As the debt market and interest rates remain very attractive, we will continue to review our portfolio for financing and refinancing opportunities. Despite our strong performance, our units traded at discount to NAV and thus, we continue to repurchase under our normal course issuer bid. Through December 31, 2019, we repurchased 722,000 units and continue to do so. We believe this is an attractive investment, is accretive and in the best interest of unitholders. Those are the key points relating to our results for the quarter and year. We will now proceed to open the lines for any questions. Operator?

[Operator Instructions] And your first question is from the line of Jim Wilson with CIBC Gundy.

Just a question. I know that last year, you didn't raise dividends, you still continue to believe that buying back the shares is the best way to go. But now that you have a fairly low payout ratio, is the dividend increase a possibility?

I think our focus is to continue to lower our payout ratio before we consider distribution increases. And at the same time, if we can continue to buy back shares at discount, we will do that.

And your next question comes from the line of Sumayya Syed with CIBC.

Michael, in your comments, you noted continued retailer demand for open-air style properties. Are you seeing any incremental demand from retailers that would have typically opted for walled space but are now increasingly choosing to be in open-air style centers?

I can't say that, that's where the demand is coming from. I think it's coming from the traditional strip retailers or there are retailers that would sometimes look at enclosed mall and the strip and are clearly focused on strips only. But I think most of the demand -- and we've seen this evolution -- this is not news, evolution has taken place over the last 10 or 15 years where we've done this, where retailers that were typically in a mall -- and I can tell you some examples where we've moved people out, and they've never been outside. We've moved them out and all of a sudden, sales went up and rent went down because the mall operating costs were so high. And clearly, that was very good for our business model. And we were able to roll out stores with that particular retailer because of what happened. So I don't think it's -- the guys are abandoning the malls to go into strips. I think some people are just abandoning the malls because they can't survive, period. Though we do see some rumblings, but yes, our core tenancy are the same guys that are looking at open-air centers and are not looking at malls.

Okay. So no dynamic shift there?

No.

And just on acquisition. So last year was relatively quiet. How is that pipeline looking for value-add and redevelopment properties in 2020?

So the pipeline is -- if you look at the list, it's pretty full. And we have quite a bit of product under contract. Well, obviously, not on our list yet because we haven't closed, but it's quite strong. We're very happy with the pipeline as it stands. And it's a pipeline that's going to produce some, we think, some really high-quality product.

Okay. Great. And can you just remind us on the status of the leases that were bought out last year? And then what do you expect for same-property growth this year?

So a couple of leases were bought out last year, which were major transactions. Some of it is being filled. Some of it will take a little bit longer, and we were paid to wait. But Jim, correct me if I'm wrong, we're expecting some same asset growth in the 2% style range, which for our portfolio is, we think, a pretty good and fair number.

Yes, absolutely. That's correct.

Your next question is from the line of Pammi Bir with RBC Capital Markets.