Plaza Retail REIT (PLZUN) Earnings Call Transcript & Summary

Good afternoon. I would like to welcome everyone to the Plaza Retail REIT Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] I would like to advise everyone that this conference is being recorded. I'll now turn the conference over to Mr. Michael Zakuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zakuta.

Thank you, operator. Good afternoon, and thank you for joining us on our Q4 2020 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. Our outlook is very positive as we've experienced a solid improvement in our business. Our tenant base of essential needs and value retailers operating in open-air centers, located in primary and strong secondary markets across a wide geography, has allowed us to successfully weather this pandemic. Leasing activity continues to improve. In 2020, we leased over 1 million square feet of space, 818,000 of renewal, 69,000 square feet in newly created space and 140,000 square feet of backfill leasing of vacant space, 60,000 square feet of backfill space in Q4. We continue to see demand from dollar and grocery stores, pet retailers, value retailers and fast food players for pizza, chicken, burgers, Mexican food. We have signed 10 new cannabis deals in Ontario for existing sites and new developments. We are starting to see demand from retailers who have being on the sidelines since the start of the pandemic. Please refer to the Q4 presentation that is now posted on our website for an update of our top 30 tenants, our rent collection numbers and photos of projects under construction and recent openings. We continue to pursue ways of creating unitholder value through redevelopments and new developments, through noncore property dispositions and accretive financings. We have a solid business plan to deliver real per unit growth going forward. We are confident in our future prospects as we benefit from our highly engaged management team's capability to execute its business plan and our leasing and development team's ability to lease and develop high quality projects; our core portfolio of pharmacies, grocery stores, dollar stores and other essential needs tenants that have performed exceptionally well over the last year; our value retailers who have shown that they can prosper in our open-air retail centers during difficult times; our large network of properties that are important part of any retailer strategy to sell products through multiple channels; and our strategy being diversified across a wide geography with open-air properties that often dominate within their community. Our pipeline, combined with our ability to backfill our vacancies, will provide solid growth going forward. The source of future opportunities will continue to be: one, large property owners looking to reduce their retail holdings; two, positive retail property owners that struggle to fill vacancies as they are poorly equipped to lease retail space; three, redevelopment opportunities that convert enclosed malls to strip centers, multi-box stores to multi-tenant strips or any asset that requires a serious rightsizing cure, usually a significant reset or redevelopment of retail space; and four, retailer demand for new space, whether it is for downsizing or upsizing. As a small-cap REIT, we are nimble enough to adjust to changing market conditions. We are managing and allocating our capital carefully. We build what we lease often in multiple phases and are rewarded on our development program with attractive yields. We are successfully selling noncore assets well over IFRS values. These assets are typically an old KFC, whereby the highest and best use for the site is not a QSR. These sales are made with very low hurdle rates and reinvest the proceeds at higher yield and higher quality new projects. We are observing real demand from investors for quality grocery, pharmacy and dollar store open-air centers or strategically located single-use site. This demand should eventually translate into higher IFRS values for our assets. We had excellent collection results in the fourth quarter. We can highlight several factors for this success: one, our open-air properties leased to essential needs of value retailers. Two, our geography with assets in suburban primary markets and strong secondary markets, combined with an exposure to Atlantic Canada, with 60% of our assets located in this region. Atlantic Canada has been very effective in managing and containing the pandemic. Three, our culture of collaborating with retailers. As a development-oriented REIT, we have grown through doing multiple deals with our retailers across our geography. You cannot do this successfully unless you have figured out how to collaborate with your retailers. And four, and last but not least, you have to have a very dedicated and capable people in your organization. I know a number of my Plaza colleagues listen to this call. So we should take the opportunity to recognize them for their efforts and thank them for the exceptional contribution over the last 12 months. We look forward to rebounding strongly in 2021 and beyond. I will now turn the call over to Jim Drake, Plaza's CFO. Jim?

Thanks, Michael. Although 2020 was obviously a challenging year for all, our business has fared relatively well. First, our rent collections recovered significantly to almost 99% in Q4, with January 2021 collections to date at 97%. We also continue to collect the vast majority of our previously deferred rent in accordance with the agreement repayment schedules. For Q4 rent, there were no additional deferrals granted, only nominal abatements and no additional bad debt provision. Our write-offs from CECRA, bad debt and rent abatements for the year totaled $2.4 million. Offsetting this was an increase in straight-line rent as required under lease modification accounting of $40,000 for the quarter or $773,000 year-to-date. FFO and AFFO per unit for the quarter were $0.102 and $0.092, respectively, up 12% over last quarter. Excluding COVID-related impacts such as the previously mentioned write-offs, severance payments and wage subsidy as well as the impact of lease buyouts, annual FFO and AFFO per unit would have been up 6% and 10%, respectively, over last year. Our liquidity -- sorry, our liquidity remains sufficient, and at year-end totaled $46 million, including cash, operating line availability and unused development and construction financing facilities. We also had unencumbered assets with a total value of approximately $18 million. On long-term debt, during 2020, we placed $51 million of mortgages at a weighted average interest rate of 2.4%. This resulted in a decrease in our weighted average long-term mortgage rate now at 4.07%. We had $67 million of long-term mortgages rolling in 2021. We just refinanced $9 million of this yesterday at a rate of 2.38%. Over 40% of the remaining rollovers either have committed financing already in place or relate to grocery and pharmacy-anchored properties. And with an overall loan-to-value of 52% and expiring rate of 4.4%, we are confident we will refi these mortgages at a lower rate. Under our development program, during the quarter, we delivered new pads for Mr. Lube in Saint John, New Brunswick and PetSmart in New Minus, Novascotia. We completed the addition of Pet Valu and Giant Tiger stores in Timiskaming, Ontario, and completed the conversion of a previous empty Sears box into a now fully leased multi-tenant strip in Chicoutimi, Québec. The result was $37 million transferred from properties under development to income-producing during the year. We also remain very active on the development front, with numerous projects underway across our geography. For asset sales, we sold a few noncore QSRs and a noncore strip during the quarter, bringing our net proceeds for the year to $10.5 million. Finally, on fair value, we recorded a $2 million gain on investment properties during the quarter, mainly as a result of appraisals obtained. This brings our total fair value write-down on investment properties for the year to $47 million, with our weighted average cap rate currently at 7.19%. And as Michael mentioned, we do anticipate some compression of that cap rate and fair value appreciation going forward. Those were the key points relating to our results for the quarter and year. We will now open the lines for any questions. Operator?

[Operator Instructions] Your first question comes from Liyan Chen from IA Capital Markets.

I was wondering if you can further comment on your leasing activity for 2021. You've talked about the net renting space. What about the lease renewals and leasing spreads for this year?

Well, we're very confident about lease renewals for 2021. We've done a number of them already and anticipate positive spreads and a pretty solid year for lease renewals.

Great. And just last one for me. Just what are your thoughts on the rising construction costs? Have they affected your expectations of yield on cost? And ultimately, if that had an impact on your project development funds?

Yes. No, we're definitely again experiencing some pricing pressure for construction. It varies, again, very much by region. And as you know, we have a very wide geography and with typically projects going on like 6 provinces. So sometimes we will see wide variances for similar projects, but there's clearly an uptick in construction costs. We try to make up for it in how we negotiate our rents and look for a bigger cushion. But probably what ultimately saves us at the end of the day is that our financing costs are much lower than we would have anticipated, and what we would usually put in our pro forma when we make a decision to move forward on a project. And then again, we have construction budgets. Sometimes they're over, sometimes they're under. I can say that they've gone both ways for us, but we're clearly budgeting for higher costs and trying to obviously make up for higher rents, not always possible. And we do have a cushion in typically the way we plug-in our debt estimate. So that's going to help. But there's definitely an issue out there. There are definitely issues in obtaining materials, certain types of materials for our projects, which slows down delivery, which is always an uncomfortable situation. It's not alarming, but it's definitely there.

Your next question comes from Jenny Ma from BMO Capital Markets.

Michael, maybe just following on the same topic there. You've generally guided to develop yields of 8% to 10% on average, and it's good that you're able to offset some of the construction costs with lower financing costs. But net-net, could you share with us sort of where you've been trending in that 8% to 10% range over the last couple of years? And whether or not you think that range is going to have to give a little bit given where things are going?

Yes. I think the range, we'll have to give a little bit. But again, I think we're trying to maintain that ultimate development spread, if you wish. So I think that -- are we going to see 10 percenters? It's going to be -- we're going to have to be very, very lucky. You can get that if you lock out in some of your redevelopment assumptions. If it's a really, really simple one-user-style project with very little risk, you're going to be lower or you're going to be -- you're going to have a 7% in the unlevered yield. And if you have a good multi-tenant deal, you should have a solid 8-plus-style percent return. So I think you're going to see a little bit lower range than we've seen over the last few years as a result of construction costs and hang over from pandemic.

And where have you been...

Sorry, I'll just quickly add. As Michael mentioned, the financing is extremely accretive. So we're still making very attractive leverage returns.

Great. And where have you trended in that 8% to 10% range in the last year or so?

I'm not following your question. Where have we...

Sorry, like in the last couple of years, like what are you coming on for completed projects in the last couple years?