SmartCentres Real Estate Investment Trust (SRUUN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the SmartCentres REIT Q2 2026 Conference Call. I would like to introduce Mr. Peter Slan. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to SmartCentres' Second Quarter 2026 Results Call. I'm Peter Slan, Chief Financial Officer. And as in prior quarters, 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'll begin today's call with some comments from Mitch. Rudy will then provide some 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 today. Mitch, over to you.

Thank you, Peter. Good morning, and welcome, everyone. I will be brief so we can get to your questions. Q2 was very solid in all categories. Here are a few examples. The SmartCentres portfolio delivered on same-property NOI growth at 2.6% for the quarter or 4.4% ex Anchors. Occupancy grew to 98.1% for in-place and committed deals. Rental lists were up 12%, excluding anchors on lease extensions. Leases have been executed at higher rents in 4 of the 6 ex Toys locations, 3 of which we completed by the quarter end and 1 shortly thereafter. And 86% of 2026 maturing leases were executed by the end of Q2. Our 200,000 square foot flagship Canadian Tire store in Leeside/Rosevale is on track and near completion with turnover expected in the next few months. All in all, the portfolio continues to show its strength. This includes commitments by many of our major retailers to expand their store count in our existing portfolio as well as in our retail expansion program. In that regard, we will continue to stay on strategy expanding our retail portfolio around our major retailers' growth needs like Walmart, Loblaws and Costco. This expansion program continues to move forward step by step with specific projects and details to be made available in the months ahead. Stay tuned. At the corporate level, we continue to carefully manage our balance sheet, debt and related metrics. We've also taken steps to insulate ourselves from potential interest rate increases with 88% of our debt being at fixed rates. And with that, I will pass the call over to Rudy for some more operational highlights. Rudy?

Thanks, Mitch, and good morning, everyone. Q2 gained further ground from the likes of grocers, TJX banners, pharmacy, dollar stores, banks and more, leading to the signing of nearly 0.25 million square feet of leases in the quarter. Occupancy returned to above 98% with 4 of the 6 ex Toys boxes locations being leased. And as Mitch mentioned, operationally, the portfolio is strong, absorbing some of the best retailers in the country, replacing low rent-paying toys locations. And if you recall, typically visited twice to 3 times a year by customers compared with weekly visits for food and pharmacy and dollar stores, which will not only provide a much stronger covenant, but will also drive higher rents for the vacated units. The higher customer traffic will also drive higher sales for all other tenants within the centers, which then drives higher future rents on renewals and further same-property NOI growth. The ripple effect is immediate and impacts the entire property for years to come. This resiliency is also reflected in the 86% of the 2026 lease maturities already completed by Q2 with a rental lift of 6.6% all in or 12% ex anchors. Turning to cash flow. Cash collection remained strong at 99% in the quarter. And lastly, our Toronto and Montreal Premiu Premium Outlets remain at 99%, actually closer to 100% leased and continue to excel in driving traffic with improving tenant sales and advantage rent. And our premium outlook remains ranked in the top 3 in sales in this country. And land expansion for near 100,000 square feet is now scheduled to start construction in Q4 with average rents in the triple digits. Overall, we see continuation of all of this momentum into the second half of the year. Thank you, and I'll now turn it over to Peter. Peter?

Thanks, Rudy. As you've seen in our release, the FFO this quarter was unchanged from the comparable period last year at $0.58 per unit. FFO with adjustments, which excludes the townhome profits, transactional gains and losses and the term swap, was $0.54 per unit compared to $0.55 for the same period in 2025. The year-over-year decrease was primarily driven by higher interest expense and administrative expenses to the [indiscernible] incentive plan, partially offset by growth in [indiscernible]. We again maintained our distribution during the quarter at an annualized rate of $1.85 per unit. The payout ratio to AFFO remained stable at 90.5% for the rolling 12 months ended June 30, 2026. Adjusted debt to adjusted EBITDA was 9.8x, unchanged in the previous quarter. The weighted average term to maturity, including debt on equity accounted investments, was 2.9 years. From a liquidity perspective, we remain very comfortable with our current liquidity position. We recently extended our corporate revolver for an additional 2 years to 2031. As of June 30, 2026, we have approximately $715 million in both cash on hand and undrawn credit facilities but excludes any accordion features. Including the accordion, we have $965 million. During the quarter, we also recorded a fair value loss on our investment properties portfolio of $196.2 million. This adjustment was mainly attributable to the deferral of development activities for certain properties under development, offset by some modest discount rate changes in our income-producing portfolio. With the recent fix use price, we unwound the remaining total return swap during the quarter and repaid the associated TRS debt. As a result, Q2 will be the last quarter that we report a TRS adjustment to our FFO other than for comparable periods. We realized a modest gain on the online transaction. And looking back over the 4 years since we initiated the swap, it generated a meaningful return to the REIT. As in previous quarters, we have updated our MD&A disclosure, focusing on those development projects which are currently under construction. As you will see on Page 17, there were 9 projects under construction at the end of Q2 and an increase of 1% from last quarter. The Vaughan Northwest townhomes were completed and removed from list, and 2 additional projects were added. One is a self-storage project in Edmonton, and the other is a 65-unit rental apartment project in the [ Art Walk ] block in the Vaughan Metropolitan Center. And with that, we would be pleased to take your questions. Operator?

[Operator Instructions] The first question is from Lorne Kalmar from Desjardins Capital Markets.

Just wondering, you mentioned starting some new development. Obviously, like there's going to be a kick off here on the retail side in a more meaningful way. How high are you comfortable taking developments as a percentage of asset value? Hello?

Yes, sorry. [indiscernible] question. No, we're at 12%. And the development that we're referring to is low rise, like single story, with a great parking for the most part. So we -- it's not difficult to manage because the rents commitment on these developments within like over a year from commencement of construction. So we're comfortable with where things are, might fluctuate up and down just because some quarters and some years, we might be developing a little bit more. But as I said, we think within a year, the rents kick in. So it's not like density where it will be in debt for years and years before we see the income.

Fair enough. Just confirming, you said you guys are at 12% of development -- of 12% of asset value right now?

Yes, that's right, 12.5% or so.

Okay. Perfect. And then this one is a little bit ticky tacky, but just noticed tenant receivables have climbed up quite sort of modestly quarter-over-quarter, but now you're kind of at levels you were at in December of 2020. ECL provision is still below. But just wondering if you could give us an idea of behind that, if there's anything really to read into there?

It's Rudy. No, that's just seasonal with normal expenses we are incurring on the property. ECL was not, as you mentioned, was not unusual for the quarter. So nothing unusual in that category. And the extent that the ECL that we booked in the first quarter have not been -- sorry, not the ECL, the receivables in the quarter, offset by the ECL, we have not adjusted that yet. So you're seeing both grow. At some point, when we remove it, the receivables will disappear and the ECL will disappear.

Lorne, I would just add -- it's Peter. I would just add that collections remain very, very high. And so nothing from an aging perspective on those receivables to be worried about.

And in fact, we were -- in the last, I don't know, 3, 4, 5 quarters, we were at 99%. We were over 99% in Q2 from our collections from our tenants' perspective.

Yes. Okay. So it should slowly start to trend down then?

Yes. Yes.

The question is from Mario Saric from Scotia Capital.

Just on the capital allocation side. With the wind up of the TRS swap, does that change how you think about allocating capital? The units are still trading at about a 20% discount, give or take, to your IFRS fair value. Just curious in terms of how it changes anything, if at all?

From the point of view of buying back units, we don't have [indiscernible]. That's for sure.

Yes. Okay.

It's public. I buy units fairly often. We're not suggesting it's not a good price. But at the moment, we really does not have any plans to buy back stock, yes.

Okay. And then just conversely, with respect to the balance sheet and asset sales. Can you give us an update in terms of your conviction level and getting something done on the disposition side in '26? And whether kind of that $200 million to $300 million disposition pipeline over the next 2 to 3 years is still intact?

Very much so, I mean, things, I'd say, they move all over the place. 1 week to the next, the more [indiscernible] are slowly competing on that front. I mean not so much that the economy is pumping or anything. It's just that I think people are just scaling a little bit. They have more visibility on period for goodwill, and that some people are back in the market. Some sectors are starting to get in the mood. So we are talking to [indiscernible], but nothing at the moment worthy of announcing, but we are very much committed to that level of positions.

Okay. And then just switching over to operations. You've done a really good job of retenanting or releasing for the Toys"R"Us, I think it was an expected 25% higher net rent as well. Can you just maybe give us a sense of the cadence of getting the other -- the remaining 2 leased up.

We have interest in both, some very interesting -- strong interest in one of them, real upgrade and improvement. And the other one, good interest in. So we're pretty optimistic about that. Any other?

Yes. No, I would just say the uses that we're looking at will be, again, as I mentioned for the first quarter, better covenants, higher tropic generation, higher traffic for all the other tenants in the shopping center as well. So I think it will be very much a big step-up from the traffic that the toys generated on-site.

Got it. And is the expected rent commencement on the 4 that have been leased, is it still potentially in Q4 '26? Or is that more of a '27 event? And do you think that the other 2 could be reproduced in 2027 as well?

The 2 that are under negotiation will probably be very likely be 2027 rent commencements.