Primaris Real Estate Investment Trust (PMZUN) Earnings Call Transcript & Summary

Thank you. Good morning and welcome to Primaris REIT's second quarter 2026 results conference call. At this time, all lines have been placed on mute. After the prepared remarks, there will be a question and answer session. You may ask one question and a follow-up, at which point you may return to the queue. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now turn the call over to Claire Mahaney, VP, Investor Relations and Sustainability. Please go ahead.

Thank you, Operator. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Primaris REIT's control, that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions, risks, and uncertainties are contained in Primaris REITs filings with securities regulators. These filings are also available on Primaris REITs website at www.primarisreit.com. I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer.

Good morning. Thanks for joining Primaris REIT's second quarter 2026 conference call. Joining me today are Pat Sullivan, Rags DeVloer, Julian Schoenfeld, Leslie Bust, Morty Bobrowski, Graham Proctor, and Claire Mahaney. Halfway through our fifth year post spinout, we are having a lot of fun at Primaris. All of the hard work over the past five years is manifesting in our financial and operating results. has been a remarkable five years of change, with 70% of the portfolio new since 2021. We have moved from the 19th largest capped REIT index member to the 9th, driven by sector-leading FFO per unit growth, significant portfolio growth through net acquisition activity, and as our FFO and AFFO multiples have expanded to the low end of our peer group. We are still in the early innings of the mall recovery story. In June, we announced visibility to approximately $52 million of incremental annual cash NOI from leasing activity expected to commence over the next three years, underscoring what we believe is one of the strongest embedded growth profiles in the Canadian REIT sector. With in-place occupancy currently sitting at 86.6%, we have approximately 1,000 basis points of occupancy gains ahead of us to get us to stabilized occupancy of 96%. The $52 million we have identified comes from three sources. First, signed and committed deals. Second, future lease-up at our 10 most productive centers. And third, lease-up of the 10 former HPC spaces that are now 84% leased or in advanced negotiations that rents four times higher than previous. previous. Compared to the midpoint of our 2026 guidance range, this represents more than 13% growth in NOI over the next three years. Taken together, our leasing pipeline and improving portfolio quality initiatives provide a clear and highly visible path to meaningful earnings growth over the coming years. With significant embedded NOI growth already identified, a stronger and higher quality portfolio and multiple sources of internally generated capital, we believe Primaris is exceptionally well positioned to create long-term value for unit holders and further strengthen its position as Canada's leading owner of dominant enclosed shareholders. With that, I'll now turn the call over to Pat, who will walk you through our operational results for the quarter.

Thank you Alex and good morning everyone. Year to date tenant demand remains robust with both the quality and volume of executed deals continuing to improve. CRU leasing performance is outstanding, driven by record leasing volume, strong renewal spreads, and sustained tenant demand. Leasing activity across our former HBC locations continues to accelerate, with retailer demand well ahead of our initial expectations. Benefiting from a constrained retail supply environment and the high quality of these real estate assets, we have leased our advanced negotiations on 84% of the former HBC space, including that are under long-term lease agreements. Upon commencement, these leases are expected to contribute approximately $19 million of annualized net rent or $22 million of cash NOI from a diversified roster of high credit quality tenants. We believe the full impact NOI could be higher as this analysis does not account for the benefit to adjoining retail premises. which are currently vacant that will benefit from being next to new tenants generating higher traffic. These leases executed to date are at rents nearly four times that have previously generated by HBC from the same space. Anticipated cash rent commencement from redeveloped HPC locations will begin in some properties as early as early 2027, with overall yields expected to be approximately 10%. On to our operating results. Same property NOI performance this quarter was fundamentally very strong, driven by rising base rent resulting from strong leasing volume, as well as rental escalations and high percentage rent driven by rising sales. The reported 0.5% increase in same property at cash NOI was impacted by $0.4 million in prior year property tax recoveries, as well as $1 million in lower rental revenue due to the disclaimed HPC leases. Excluding the $0.4 million contribution from the recovery of property taxes last year, same properties cash NOI would have seen an increase of 1.1%. Notably, Q2 2025 was the last quarter of full rents from HBC. We anticipate the same property NOI growth is likely going to jump next quarter, accelerate further in the fourth quarter, and again in the first quarter of 2027. We expect it to then remain elevated for the following 10 quarters. Leasing activity was extremely strong during the quarter with 109 leases renewed across 482,000 square feet. CRU leasing spreads were 5.8% and 7.4% for the overall portfolio. Fifty-one new deals encompassing 213,000 square feet were completed during the quarter, including 45 new CRU deals for 86,000 square feet. New CRU leases completed during the quarter were completed at a weighted average net rent of $52.20 per square foot. For context, average CRU rents in the portfolio have risen to $50.69 per square foot as at Q2 2026 from $42.02 per square foot at the end of 2022. The portfolio's 91.1% committed occupancy compared to 86.6% in-place occupancy represents 450 basis points of embedded occupancy growth already under contract. This committed space provides approximately $15 million of base rent, a strong source of future NOI growth and demonstrates the momentum of our leasing program. Another key occupancy stat for us is CRU occupancy, which refers to the space under 15,000 square feet. CRU in-place occupancy improved 290 basis points to 92.3% from 89.4% a year ago. Stained property CRU occupancy is even higher at 93.1%, reflecting the lower CRU occupancy in newly acquired centers than our portfolio average, which provides significant income growth in these high performing centers. Occupancy is a key driver of recovery ratio improvement, and CRU occupancy has the greatest impact on this metric. Many of the properties acquired since 2022 had an elevated CRU vacancy and are leasing efforts to reduce this vacancy at malls such as Conestoga, Devonshire and Oshawa Centre have resulted in higher NOI over the past few years. With continued strength in new CRU leasing coupled with accelerating leasing progress with HBC replacement tenants, occupancy and recovery ratios will continue to improve at our properties, including newly acquired top-tier centers such as Oshawa and Gallery de la Capital, where recovery ratios remain well below our target levels. Sales continued to be strong with all-store sales volume at $3.5 billion and sales per square foot at $825 per square foot for the 12-month period ending May 2026. Notable increases were realized at Orchard Park where sales volume is up 10% to $220 million and at the Halifax Shopping Center. shopping centers where sales volume is up 8% to $300 million, as well as South Gate and St. Bruno, which are growing at high single digits. Conestoga Mall, which we called out last quarter, is now producing over $200 million in sales volume as a result of the significant leasing activity at the property. In Q2, we approved a $50 million redevelopment of the food hall at Promenade St. Bruno. At present, the food hall area encompasses approximately 30,000 square feet and generates substantially no income. The project is expected to generate approximately 10% return and will be completed within 24 months. In closing, strong leasing momentum, accelerating HBC retenanting, and a strengthening tenant roster positions us for meaningful NOI growth in the years ahead. The underlying fundamentals of the portfolio remain exceptionally strong, reinforcing our confidence in long-term value creation for unit holders. With that, I'll turn the call over to Julian to discuss our land optimization strategy, dispositions and acquisition outlook.

Thank you, Pat, and hello everyone. Alongside this tremendous operating momentum, we are actively executing on our land optimization strategy, which is focused on unlocking value from excess and underutilized land across the portfolio that generates little to no NOI today. We have identified a potential pipeline of $275 million to $375 million of excess land, which we intend to monetize over time. unlocking embedded value and generating an additional source of zero-cost capital to fund future growth within our core portfolio. By monetizing these land parcels and redeploying the proceeds into our higher-yielding enclosed shopping center business, we can create meaningful value for unit holders while remaining focused on our core strategy. Several sites are already under contract or actively being marketed. Importantly, these opportunities have been evaluated to ensure they can be executed without disrupting mall operations. As a reminder, we have no intention of owning, managing or developing residential properties ourselves. In Q2, we also completed some smaller but strategic shopping center transactions, totaling $100 million of dispositions and $68 million of acquisitions, improving the portfolio quality and metrics, as well as simplifying our balance sheet with fewer co-owned properties and less secured debt. The dollar amount may appear small, but the impact to our broader portfolio metrics are meaningful. Occupancy at the disposed properties was higher than that of the remaining portfolio. However, the tenant mix was weighted towards short-term and specialty leases, reducing the overall quality and stability of cash flow. These transactions contributed to the sales productivity increasing to $825 per square foot, long-term in-place occupancy growth to 83.5%, and weighted average net rent per square foot growth to $32.84, resulting in a significant increase in cash flow quality and and durability. Beyond excess land, we've also identified approximately $200 million of non core retail pads and other assets beyond what is currently reflected as assets held for sale that may be monetized overtime. To get to that, Together, these initiatives represent a significant source of low cost capital to fund future growth and enhance portfolio returns. Returning to acquisitions, the annual cadence of pension fund activity in Canada has driven a meaningful uptick in discussions around acquisitions over the past month. We remain optimistic that we could acquire one or two or even three malls this year, though nothing is in that advanced stage or has any certainty today. As a reminder, our target acquisitions are typically in the $300 million to even more than $600 million range for each mall. With that, I'll turn the call over to Rags. Thank you, Julian, and good morning, everyone.

Primaris supported FFO per unit of 45.1 cents per diluted unit up 1.3% for the quarter over last year. This year over year increase was achieved despite the impact of approximately 1.9 million in terminated transaction costs, 0.4 million of lower prior tax recoveries recorded in 2026 over 2025 and 1 million of lost rent from the now disclaimed HBCU leases, excluding the 1.9 million in terminated transaction costs and the 0.4 million impact of prior tax recoveries, FFO per unit was up 5.4%. This growth, even after absorbing the loss of $1 million of HBC revenue, speaks directly to the strength of our underlying core portfolio and operating business. We achieved these impressive per unit results despite non-core asset sales over the last 12 months and the impact of the disclaimed HBC leases. If you're trying to reconcile same property NOI growth to FFO growth, it is important to note that over one third of our 2026 cash NOI guidance is attributable to the 2025 acquisitions, which is not included in same property NOI. which have also benefited from strong NOI growth due to robust leasing activity. As a result of this dynamic, we have added new disclosure on quarterly same property cash flow growth in section 9.1 of the MD&A. Consistent with prior years, NOI growth from recent acquisitions has boosted overall NOI growth. Also reaffirming our 2026 guidance, most recently updated and disclosed in our press release dated June 29th, 2026. to the balance sheet, we remain very comfortable with our financial position. At quarter end, average net debt to adjusted EBITDA was six times, liquidity was $655 million, and we continue to have no debt maturities until 2027. In March 2027, we have $250 million in an unsecured debentures maturing at 4.82%. Today, we could issue five year unsecured debentures at approximately 4.25%. We remain disciplined in our approach, well capitalized and well positioned to continue executing on both internal growth initiatives and selective external opportunities. With that, I'll turn the call back to Alex.

Thank you, Rags. As you can see, our team continues to deliver remarkably strong leasing activity and very solid operating results across the portfolio. Our progress is increasingly being recognized in the capital markets, with our weighting in the TSX capped REIT index rising to over 5%, and our trading liquidity now nearly five times what it was two years ago, as measured by the dollar value of units traded per day. We saw strong engagement from the investment community at our recent Oshawa Center property tour. The event provided investors with a firsthand look at one of our dominant centers that we have added through our acquisition program and showcased the significant leasing progress, redevelopment opportunities and long-term growth potential embedded within the asset. Building on that momentum, we look forward to welcoming investors to our upcoming Investor Day at Promenade St. Bruno this fall, where we'll be able to provide a deeper look at our strategy, portfolio strengths, value creation opportunities, and the substantial growth runway we see ahead. We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions.

Thank you. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. You may ask one question and a follow-up, at which point you may return to the queue. pause for just a moment to compile the Q&A roster. Your first question from the line of Lorne Kalmar with Desjardins. Your line is open.

Thanks. Good morning, everyone. Julian, you mentioned a bit of an uptick in conversations around acquisition with the pension funds. Just wondering if you could elaborate on exactly what's been driving that.

I think as we're approaching kind of year end and folks are looking at their targets or goals for the year, that can tend to be a bit of a driver. You know, it's hard to kind of understand everyone's specific or unique motivations in the background, but we are relatively active with them, nothing that's advanced, but, you know, With the cost of capital that we have now and the access to capital that we have, that could potentially be driving it, but... Um, you know, again, nothing, nothing specific to report right now, but we're hopeful that we'll be able to drive at least one this year.

Okay. And then I guess you kind of alluded to it a little bit there, but just with the stock now trading above IFRS, it obviously changes or can change the calculus on the transaction structures. Has that been reflected at all or have conversations changed?.

it all as a result of that? I'd say it gives us more tools in the toolbox to use to affect the transaction, and we're not shy about bringing that up. We remain open to using structured acquisition tools structures, but ultimately, yes, it gives us more tools in the toolbox, and we're not shy to mention that.

Okay, thank you very much. Your next question from the line of Mark Rothschild with Canaccord. Your line is open.

Alex, you made a comment about the market, the capital markets recognizing increasingly the value of primarist units and obviously the unit price has done quite well of late. To what extent does this correlate with any who's at all in cap rates in the market or the prices of deals that you're seeing or is it simply that unit price was just severely undervalued for some time. Thanks, Mark.

know it it's very difficult to ascribe- you know the reasons behind you know a stock price movement as you know- I would I would say, you know, a couple of observations, though. What we have seen in the direct property market is a significant uptick in the number of parties interested in acquiring close shopping centers, most of those parties remain focused on sort of the mid-tier and lower type properties and generally, you know, ticket size of under $200 million or maybe $150 million. And So I think that I think that's probably a part of it, but also the. the liquidity in our stock was really probably the biggest thing. When we talk to some of the trading desks about what is happening with our stock, There's a couple of dynamics that they consistently cite. One is very large institutions that were constrained by a lower daily trading volume that we had until earlier this year or late last year. And then the second thing is I think there were a number of investors who were didn't pay a lot of attention to Primaris when it was a smaller index weighting. And, you know, you can probably skate by without having any exposure. It all sort of came together at the same time as the liquidity increased, our weighting in the index increased. You had First Capital announced their privatization, which I think also created a little bit of a tailwind for retail property, broadly things, you know, at least that's how we see it, but, you know, could be something entirely different that we're not aware of.

Okay, great. Thanks. And maybe just one more. It seems like selling off some residual density of property selling land is that you're going to be looking to do. To what extent is this something we should expect in the near term? Because obviously development land is not trading as much now as it might have been a few years ago. David Elikwu Yes, Mark, on the land side,.

What I would say is you're right, the market has changed, and particularly as it relates to residential being PBR and condo. It's come down in many markets, but I'll say we're not. We're not just focused on that. We're looking at all different asset classes of seniors. Housing has become quite interesting hospitality as well. We've been having discussions on student housing and self-storage depending on the site. I wouldn't take the depressed residential in some markets to be a sign that we're not going to be active on it. We're looking at highest and best use for each market separately and and were were active. I'll even stay on the residential side- there are some markets that are still holding up strong and that can still benefit from- the you know, favorable government incentives as well as favorable financing. So again, we're not in a rush to do something if a particular market or use is challenged, but we are being creative. We're talking to parties across kind of the entire landscape. So stay tuned.

Okay, great. Thanks so much. Your next question from the line of Pammy Beer with RBC Capital Markets. Your line is open.

Thanks, good morning. Just given the progress on the leasing and I guess your comments on organic growth, how do you think St. Propp and NY growth shapes up? in 2027 versus say the you know that standard three to four percent three-year target that you've you've got it to.

Yes, I mean, it's sort of a little bit of a TBD. What's really going to dictate it is just the cadence and the timing of when these leases all roll in. And we are approaching our budgeting process for 2027 and beyond, which we'll be doing over the next 30 days, 45 days. But I think qualitatively you could say we expect our same property to exceed that three to four percent range. probably for the next three years consistently, and how much it's going to exceed that by, you know where it sort of lands um you know a lot of it could land in one year or you know it could be equally spread out it really just depends on um when all of the leases take effect. But yes, I would think, you know, it would be 4% plus consistently for a fairly long period of time.

Got it. That's helpful. And then just maybe as a follow up on the. on the terminated transaction costs that hit G&A. I'm just curious if you can maybe share any color as to maybe why that deal did not go forward or if it was multiple deals or one and just any insight would be perhaps helpful.

Yes, sure. So when we were looking at a transaction that was a portfolio disposition, and part of the reason the fees were more significant than we would typically see on a property transaction was that it had structure in the same way that when we acquire properties, we give the vendors preferred equity. equity and equity. And so think about a very similar transaction, only Primaris is the vendor. And we were doing that because We had concerns that we would not have enough capital to fund all of the acquisition opportunities that we encountered, and ultimately, we ended up terminating the transaction when Two things happened. One was that we had success finding buyers. We had unsolicited interest arrive for McAllister, for Marlboro. And we've now concluded two of those enclosed mall transactions. So it became easier for us to sell properties because, as I mentioned earlier, there's quite a number more people interested in buying the mid-tier mall properties. And the second thing is that our stock price moved from 14s last year up to 19 at the time that we terminated the transaction. And as Julian was saying, you know, with our stock price higher, you know, when we engage with prospective vendors, it's an easier conversation. You can imagine that a few years ago when we were trying to get people to take our stock at $22 when it was trading at $13. It was a bigger discussion point than it is when your stock's within $1 or $2 or $3 of the IFRS fair value.

Thanks very much. Thanks, Polly. Your next question from the line of Sam Damiani with TD Cowan. Your line is open.

Thanks. Good morning, everyone. Just on the recovery ratio, It's not in your guidance officially, but give some thoughts as to where that would land in 2026 for the full year and into 2027.