SmartCentres Real Estate Investment Trust ($SRUUN)

Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q1 2026 Conference Call. I would like to introduce Mr. Peter Slan. Please go ahead.

Thank you. Good afternoon, and welcome to SmartCentres First Quarter 2026 Results Call. I'm Peter Slan, Chief Financial Officer and I'm joined on today's call by Mitch Goldhar, Executive Chair and CEO; and by Rudy Gobin, our Chief Portfolio and Asset Management Officer. We will begin today's call with some comments from Mitch. Rudy will then provide operational highlights, and I will review our financial results. We will then be pleased to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A. This also applies to comments that any of the speakers make on today's call. Mitch, over to you.

Thank you, Peter. Good afternoon, and welcome, everyone. As in prior quarters, we will keep our comments brief to allow more time for your questions. strong retail fundamentals highlighted in 2025 have continued into early 2026. With 80% of our 2026 lease maturities extending by the quarter end at retail lifts of 11.5% and anchors. This strong retention rate and rental lift is further supported by a 3.4% same property NOI increase. Anchors. Demand for space, including new build built space remains strong as we continue to improve our tenant mix and covenants. As we mentioned in February, we terminated 6 Toys "R" Us locations in early July before their CCAA filing. This gave us the flexibility and control we needed to manage the re-leasing of these locations. Shortly after the quarter end, we reached commitments with various grocers for 3 of the ex Toys locations, for which we are currently finalizing the documentation. We have also reached a firm commitment with TJX for a winners in a fourth location. With these deals, if measured today, our occupancy would be 98%. Further, these deals offer higher quality, stronger covenant and new 15-year terms and 10-year term, respectively, replacing the 3-year term we had. And all that with higher traffic all year long and not just in the fourth quarter. Most importantly, the new net rents are 20% to 25% higher than the previous Toys rents, adding NOI, stability and valuation to our portfolio. As I have said previously, we will stay on strategy. Taking the appropriate time in building a strong, stable portfolio for the long term. As we noted in our Q1 press release, we are embarking on a retail expansion program. The 3 projects announced, our Board approved and just the beginning, 2 of which will start construction later this year. We expect these new build developments to deliver accretive FFO growth with the program, which has been going on for a while now, will continue for many years. Stay tuned for further announcements in the coming months. At the corporate level, which Peter will speak to in a few minutes, you will see that we have continued to carefully manage our balance sheet debt and related metrics. Our financial flexibility remains strong with over $1 billion of liquidity and an unencumbered asset pool of $10.2 billion. We have also taken steps to insulate ourselves from potential interest rate shocks with 88% of our debt being at fixed rates. With that, let me turn it over to Rudy for some more operational highlights. Rudy?

Thanks, Mitch, and good afternoon, everyone. The resiliency of the SmartCentres Walmart portfolio was once again a standout for Q1. Same-property NOI continued its strong momentum with 3.4% growth ex anchors in the quarter. And if we looked at the longer term of the trailing 12 months, we are at 4.8% ex anchors or 3.0% all-in. Occupancy in the quarter experienced a temporary drop to $97.6 percent, largely because of 1 tenant, Toys RS, which Mitch mentioned earlier, with in early January that was termination that we did deliberately to get control of the space. Now with the committed deals from grocers and TJX, we have in hand since the quarter end, if measured today, we would be back at 98%. And with 4 of the 6 toys, units attracting rental increases of 25% above what toys was paying, as Mitch mentioned. And so the longer-term NOI and FFO looks even better on a go-forward perspective, all combined with a stronger covenant portfolio. This resiliency is also reflected in the 80% of the 2026 lease maturities already completed and with a rental lift of 11.5% ex anchors or 5.8% all-in. Cash collections continue to remain strong at near 99% in the quarter, and demand continues from our core tenants, grocers, TJX Banners, Canadian Tire brands, Dollarama, pharmacy, banks, pet stores and fitness. Along with these, we are also integrating a bit of entertainment, racket and sports rounding out a more fulsome retail offering where our minor vacancy exists. Our premium outlets continue to excel in driving traffic with improving tenant sales and the resulting percentage rents. Toronto Premium Outlets is doing very well and is ranked in the top 3 in sales in this country and providing an expansion opportunity of near 100,000 square feet. With 50% of the lease completed, this expansion will be accompanied by a new parking deck and construction is scheduled to commence later this year for a grand opening in late fall next year. Overall, the business remains strong, rents are growing and the covenant quality of the portfolio is improving. We expect this momentum of rental growth and occupancy to continue throughout 2026. Thank you. And I'll now turn it over to Peter. Peter?

Thanks, Rudy. As you have seen in our release, the change in FFO this quarter was primarily due to higher interest and G&A expenses, partially offset by the higher net operating income. Our G&A expense this quarter included approximately $2.7 million of nonrecurring costs associated with the renegotiation of the various agreements with Penguin. Excluding some nonrecurring costs from the comparable period in the prior year, the net G&A run rate increased by about $1 million. This is an improvement over our estimate when we announced the renewed agreements with Penguin, although we continue to believe that an incremental $1.5 million is appropriate for subsequent quarters. As we noted at the time, these new arrangements have resulted in a meaningful simplification of our arrangements with Penguin. The earnouts are settled with the related development lands now being solely for the benefit of the REIT. The mezzanine loans, where the total committed amount was as high as $330 million, half of which was drawn at various times, have all been eliminated. The voting top-up right has expired and was not renewed. The variable portion of the Penguin services agreement has been eliminated in exchange for a single fixed fee and the noncompetition agreement was renewed. We again maintained our distributions during the quarter at an annualized rate of $1.85 per unit. The payout ratio to AFFO remained stable at 89.9% for the rolling 12 months ended March 31, 2026. The adjusted debt to adjusted EBITDA increased modestly to 9.8x. However, the proceeds from the partial settlement of the total return swap just after the quarter end were used to retire debt, resulting in a pro forma ratio of 9.7x, unchanged from the previous quarter. The weighted average term to maturity of our debt, including debt on equity account and investments, is 3.1 years. As in previous quarters, we have updated our MD&A disclosure, focusing on those development projects that are currently under construction. As you can see on Page 17, there were 8 projects under construction at the end of Q1 unchanged from last quarter. And with that, we would be pleased to take your questions. So operator, can we have the first question on the line, please?

[Operator Instructions] The first question is from Sam Damiani from TD Securities.

First question, I guess, just on the Toronto Premium Outlet expansion that was alluded to. Could you provide a little more detail, I guess, on the cost and the return on that?

Sam. At the moment, the expansion, 100% numbers is about $110 million. And the projected return on that is in excess of 8%.

Did you say day 1?

Yes. Like the initial day 1 rent projection, as a return in that -- of that $110 million is -- I think it's something like 8.5% or 8.4%. It's already 50% leased, and that's partly self -- it's partly deliberate. .

You're confident I'm sure that it will be substantially, if not 100% leased on opening?

Yes, yes. It's very much the case. It's really very in demand.

That's great. Congrats on getting that going. And then the 3 new greenfield projects, I guess, 2 of which are starting later this year. Is there -- are there sort of size and scope metrics that you're disclosing publicly, including the location specifically?

Yes. I mean, like the rest of the portfolio, I mean, it's going to vary the sides, but it's pretty typical smart centers type stuff in terms of size. They'll be anchored all of them. And Yes. I mean probably I don't know whether we announced the sizes in there, but very much typical. Some of them will be 2 anchors. So they're not small. .

These would be somewhat meaningful supply additions to, I assume, the trade areas of these locations, what gives you the, I guess, the confidence and the conviction to move ahead in these 2 or 3 locations.

Well, I mean, first of all, the retailers, I mean, these are properties we're buying because we have pre-leased to anchor tenants. So you could say they're being driven by consumer demand. keeping in mind that many, many retailers, major national retailers have not expanded in sync with the population growth. Things really stopped growing in sync with reputation probably 15 years ago. So in addition to the pause of physical retail growth around e-commerce a 15 years ago, you also had a lot of inflation on the value of residential land. So you didn't see -- you saw a lot of retail being converted to residential density all over. And then you had you had some very healthy annual population growth in this country for the last 15 years. So when you put it all together, there are -- there's quite a few large national retailers who are playing catch-up, I should have mentioned COVID, which then came along. So then we come to now -- and so there's a lot of national retailers who have -- who are interested in catch up a lot of residential growth across the country and small, medium size, large sized markets. So yes, I mean, these are some of the -- these are some of the factors, some of the variables behind the reasons and the confidence for what we're doing.

And I don't mean to hog the puck here, but Mitch, obviously, you're going to be building these out in phases, much like the existing SmartCare portfolio so that as the buildings are leased building them out in phases such that they're all -- like if the center is going to be 350,000 square feet, it's not going to be all but in 12 months.

I'd love to just say I love to scare you and tell you that we're going to go and build the 350 all at once. But actually, I can't do that to you, Sam. We are -- we've never built -- I mean, for all intents and purposes, over the last, whatever it is, 35 years, we've never really built from scratch a space that isn't leased. That's why we've always -- that's where we've had the earnouts. That's why we've got bacon parcels here and there because we never built spec take. Now there are times where we -- on a CRE building, we might add 2,000 or 3,000 or 4,000 square feet because it makes sense. But other than that, it's -- we build as we lease.

The next question is from Lorne Kalmar from Desjardins.

Maybe just switching gears a little bit. I mean, you're talking about turning on the development types here on the retail side. And just wanted to see if there -- if that influences in any way the outlook for dispositions, are you perhaps a little bit more motivated now that you're going to have to fund some of these developments? And what are you seeing out there in the market? What do you think is achievable in 2026.

Yes. I mean we've always been motivated to dispose of certain assets, ideally, some land and to the extent that we can't do that because the market, which I'll comment on in a second, we'll just gauge the rate of our development around our various metrics. But we are confident that we will be able to achieve some dispositions finally. The market's a little later slowly, but surely. And ideally, it will be some of our PUD, but yes, if the market doesn't cooperate, we'll act accordingly in terms of the rate of development. Keeping in mind, this development is not high-rise. This is like we build a Loblaw store. We started it today, we would be paying rent in a year from now or less. So we're not really carrying the debt for very long. So the path to EDA is really very short and straight forward. But nevertheless, we're really managing. That's how we'll be managing. It would be great if we could achieve some dispositions in the next 6 to 12 months.

And I guess maybe in the event that you can't -- because obviously, there's a lot of stuff beyond your control, unfortunately. Is there like a top end you'd be willing to let leverage go to?

We like our we'd like to maintain our current debt rating. So I think just in some vague-ish kind of way that would probably be one of the guiding metrics that would determine whether we go or don't go on something. Then generally speaking, the land that we're buying is not most of it's not really needle-moving stuff. It's more the development itself. So we're certainly pretty confident that we'll be able to continue move the development program along and as I said, we've -- the only sites we're buying is when we have pre-leased to anchors. And so we'll -- even if we have to, we would -- I can't imagine it would ever be the case, we can always slow down acquisitions, but it's the commencement that we'll be watching closely around our around our debt metrics. So it's not very difficult to do.

Lorne, it's Peter. I was just going to add. We do have some levers to pull. As you saw this quarter, we unwound a portion of the TRS use those proceeds to delever a little bit. So -- and there's still another $50 million or $55 million to go there. So there are some tools in the toolkit that we have to manage the debt levels.

Okay. And then maybe while I have you, Peter, just 1 kind of ticky tack 1 on the G&A, and I might have missed it, I think you talked a little bit about it. With the $1.5 million incremental expected. Was there -- did you say there was $1 million of that picked up in Q1, i.e., we shouldn't expect a double counting in Q2 of the $1.5 million on the -- what the resolution is approved.

That's right. That's exactly right.

The next question is from Mario Saric from Scotiabank.

Maybe just sticking with Peter on the Penguin agreements. It's a very high level. Can you just go through the numbers again in terms of the total potential impact on FFO from the rearrangements.

Well, Mario, there's really not a huge impact on FFO. The biggest impact is on the balance sheet. The largest portion of the Penguin arrangements that we settled was the earn-outs. -- which is not only with Penguin, but with some third-party partners as well. And that was about $47 million on the balance sheet. And so we now control all of those lands. Ourselves, and there'll be a future FO impact as those lands get developed at some point in the future. But the current impact is mostly the G&A that we discussed in the press release about $1.5 million a quarter.

Okay. I just wanted to be clear on that. And then just coming back to the Toys"R"Us discussion, what will poll spend expected on the foresigned leases that you're getting a 25% rental uplift on...

Can you say that again?

On the Fine Toys "R" Us replacement leases, the 3 with the grocers and the winners what's the estimated kind of CapEx spend required to get to the 25% uplift in net rents?

Yes. I mean minimal, ultimately minimal I don't know if we have that number at our fingertips, but Yes, there's not a huge. They're not bought sort of rental increases.

Yes. And for the most part, Mario, the grocers and the winners have taken the boxes and we're not spending money on subdividing boxes into smaller boxes or changing anything. So it's literally a handover, maybe changing some HVAC systems and so on. But like Mitch said, it's going to be minimal on the capital side.

Okay. And then maybe for Peter, during the quarter, was the interest expense associated with those vacated toys boxes, was it capitalized during Q1? I'm just trying to get a sense of the FFO impact from the vacancy in Q1. .

No, it's expensed, Mario.

And then my last question just coming about the asset sales, I think, Mitch, last quarter, I kind of said you could see your SmartCentres is selling $20 million to $100 million over the next 2 to 3 years. The timing of which is obviously very unpredictable. Is that still kind of the range that you're thinking about over the next 2, 3 years in terms of what you would like to do? .

What number did you use? .

$200 million to $300 million or...

Yes. Yes, over the next 2, 3 years, Yes. I mean if the market cooperates, I mean with Pitealone, I mean we have sort of in excess of $1.5 billion, maybe billion worth of land -- so if the market comes back even -- comes back a bit, we certainly think that we could achieve that and potentially more. But that would be -- that's sort of been our target number and still.

[Operator Instructions] The next question is from Julianna Thornhill from National Bank.

Just wanted to stick with that minor questioning. Does that kind of imply your goal is mostly to dispose of the kind of more residential exposed lands and just because of the retail market, obviously, is doing quite well. So I'm just wondering if that's the main opportunity set that you think is available versus some of the retail lands that you have.

Yes. I mean, it's not so much like disposing of the residentials that we have. We have 60 million square feet for Alto approved square feet of residential across the portfolio. So it's -- obviously, we could sell to be ideal to sell that -- some of that density since it's going to take a long time for us to build out 50 million, 60 million square feet. I mean I'll still be here, but I don't know about Rudy and Peter. And we don't want to sacrifice any of the retail because it's just so straightforward, low capital very quick path to profit accretive. You build and open in the same market. All those reasons. So yes, we don't want to sell off the retail, we think the residential, which we have an abundance of would be ideal. .

And so the earnouts that were settled this quarter, can you give us like some more sense of what that related to in terms of asset wise?

Yes, Julianna, the lands that this related to were lands within properties that were mostly developed already. So these were the -- this would be the remaining lands in those properties that were subject to final earnouts. So we've just picked up the rest of the land so that the REIT can control and lease up that space itself in conjunction with the rest of the property. So none of it was stand-alone land. It's all land integrated within a shopping center.

And just 1 other question on the Penguin agreement. Can you kind of help us understand how shifting to our fixed fee structure may change your approach to capital allocation or even just your alignment with unitholders?

Well, I think what we said was that it gives us a little bit more predictability and visibility into cash flow going forward. These are fees for development services and so they get capitalized to our development projects. And of course, the beneficial owner is also the largest shareholder of the REIT. So there's very strong alignment. And as you know, the whole approach was reviewed and negotiated by an independent committee of the Board.

We have a follow-up question from Sam Damiani from TD Securities.

Just wondering, as you look out for the balance of the year, are there any other tenants on the watch list that might give rise to some hiccups in occupancy as small as it might be or bad debt expense.

No, no. Maybe some smaller, but no, nothing like the Toys "R" Us situation. That was a big one. That hasn't happened for a while, though, frankly. I mean, I wish I could do the math right now in my head, but we collected that's probably 200 -- close to 250,000 square feet, maybe 220,000 square feet of space, probably averaging, I don't know, $15 a foot, let's say, you can probably do that in your head faster than me. But I think it's probably close to $6 million gross that we collected for many years that, frankly, was longer than I think a lot of people would have predicted for Toys "R" Us. So we probably got 2 or 3 years more out of Toys "R" Us rents. Now, of course, it happened once an impact in our quarter really, but we're coming out of this. I mean it's a setback, but it's turned and it has already turned into in advance. I mean there's just no comparison. I mean we've traded toys for food -- so -- and we've traded weak covenant for the strongest and we've traded 3-year term for 1-year term in the case of the food stores to say nothing of just the quality that it brings in traffic -- quality traffic it brings to the center. So yes, okay, fine. It cost us a quarter but it's a blip -- and when you combine it with the growth program that's going on and has been going on for a long time it's really a blip. I mean we're talking about today 3 new centers, but there are many more then 3 going on. So it really is a blip. We're really sort of excited about the future in terms of our growth and our earnings.

And just on those developments, just to clarify, was 100% owned by the REIT? Or does the REIT have partners in these?

No. These are 100% owned by the REIT at the moment. Of course, I have a noncompete. So that's in the past, of course, developed -- did end up being partners with the REIT going back. But no, these are 100% REIT.

The next question is from Pammi Bir from RBC Capital Markets.

Just want to clarify, would -- is it fair to say that the Q1 likely marked the low point for occupancy? And should we expect to see perhaps the same property NOI ramp up in the back half of the year? Or are we not quite there yet?

No, it's a low point. For us the way we see it. In terms of rent to ramp, ramp yes, the back half of the year should get back to what you've been seeing for the last little while. .

Okay. And then just maybe on the toy space. I may have missed it, but when do these tenancies start to -- like when do these grocers and the winner space, when will they take possession?

Probably near the -- I mean, maybe the earliest Q3, Q4, it depends on which 1 we're talking about. So latter half to the end of the year.

Okay. And then the -- but the economic -- like the occupancy would commence late this year or into 2027.

We're hoping we're hopeful that it will actually economic rent will commence this year.

Great. Okay. And then maybe just on Arete walk. I can't recall if we've spoken about this 1 for a while, but can you remind us the total cost of that project and the timing of completion.

Just going on reverse there. I think we're looking at -- we are -- I think we're expecting to top off in November this year. and just stand by in terms of when we anticipate completion and close to probably a year from now is, I would say, starting -- we're out of the ground. We're the garage, which is 3 levels is done. We're -- I think in the next couple of weeks, we're going to typical floors where we will start finishing a floor like month a week. So all the arduous work is pretty much done, and now it's going to be kind of a full steam. I think we'll be doing windows sometime in July, late June, July, Windows will start coming on I think I'm stalling here for somebody just quickly find it. But I think it's Q4 '27 is the first deliveries. delivery start closings in 2027.

Okay. So still some time away. I guess really where I was going with this is, have you changed First off, have you taken any write-downs at all on that project? Any changes in the assumptions on costs or the assumed default rates on the units that have been presold.

I mean the costs probably overall are the same as we originally anticipated. We've done better on some trades certainly the ones that we thankfully did not let in anticipation of some better prices. So we did wait on that. I think we could have done a little better on a couple of trades that we let -- we had to let them like the last 12 months. So I think we're pretty much on budget there. And then we have 20% deposits from the purchasers and so it's hard to say what's going to happen I think if we were closing today, just my prediction. I mean, there'll be some defaults just because I think -- but I think the most part, they were sold at an average of -- let me just check and see whether we disclose this before I say Yes. I mean we sold between 11 and $11.75 a foot there -- so we've got 20% deposits. So we've done all the slicing and dicing of analyzing what happens if scenarios where if we get units back, I mean we'd rather that not happen. But if it does, I think be in pretty good shape to either resell them at current market price or then market price or rental. And we should do -- we'll be fine with that just FYI, in terms of the analysis, we're well within the market if we were to get those back or any of those back.

Okay. All right. And maybe just moving on last one, just on the new developments that you announced, the new refill sites. Are these Walmart anchored or not other anchors, whether it's other grocers or any other of your larger tenancies.

I think it's taken 38 minutes for some of that Well, we are we're not announcing the actual tenants at the moment. But they very much reflect the overall profile of our current portfolio. So there'll be lots of familiar names in terms of the anchors that we'll be building on these properties. And as I say, the 3 that we're mentioning right now are really just represent a larger program, a larger accretive program. And I might add that for all intents and purposes, all the anchor tenants in this program have bumps and are, for the most part, between 15 and 20 years and they'll be the odd sub-anchor at maybe 10 years.

Okay. Good to hear. And I guess that answers that last question. I guess None of the anchors will have flat rents forever.

That was a dig there. No, they will not have flat rents forever.

There are no further questions in the queue.

Okay. Thank you for participating in our Q1 call. Please feel free to reach out to any of us if you have any further questions. Have a great day. We'll speak to you soon. Bye-bye.

Ladies and gentlemen, this concludes the SmartCentres REIT Q1 2026 conference call. Thank you for your participation, and have a nice day.