Plaza Retail REIT

Thank you, operator. Good morning, everyone.

And thank you for joining us on our Q2 2021 results conference call. Before we begin today, we are legally obliged to advise you that in talking about our financial and operating performance, and in responding to questions today, we may make forward-looking statements, including statements concerning Plaza's objectives and strategies to achieve those objectives, as well as statements with respect to our plans, estimates and intentions, or concerning anticipated future events, results, circumstances or performance that are not historical facts.

These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the risks that could impact our actual results and the expectations and assumptions we applied in making these forward-looking statements can be found in Plaza's most recent annual information form for the year ended December 31, 2020.

And management's discussion and analysis for the period ended June 30, 2021, which are available on our website, and on SEDAR at www.sedar.com. I will now turn the call over to Michael Zakuta, Plaza's President and CEO.

Michael?

Good morning. I'd like to welcome Tim Strange, our General Counsel and Secretary to our call today.

Kim was recently promoted to this position. She is based in Fredericton as a youthful veteran and part of our executive team.

We felt that would be appropriate to have her with us on these calls in the future. Our outlook continues to be very positive.

Our portfolio of essential needs and value retail open air centers located in primary and strong secondary markets across a wide geography are performing well. Our focus has clearly shifted from managing the effects of the pandemic to pursuing growth opportunities.

Plaza achieves growth in different ways. One, meeting demands at retailer.

Plaza communicates with major retailers to identify development and/or redevelopment opportunities. Our Hogan Court Plaza development in Halifax, Nova Scotia is a result of Atlantic superstore desire to be in this market, and their new store opened in March.

We currently have similar projects and planning are under development and other new opportunities in our pipeline. Two, redeveloping well located retail properties.

To date, we have successfully redeveloped 14 enclosed malls into open air centers, and has successfully redeveloped numerous retail projects, including repositioning and filling empty box stores. A good example is our recent acquisition of the grocery anchored Northern Avenue Plaza in Sault Ste.

Marie, the lease buyout of a non-operating large box tenant. This past quarter allows us to redevelop and fill the larger box space with multiple tenants.

Three, actively managing our portfolio, Plaza is constantly evaluating its existing portfolio for opportunities to improve its tenant base and grow future revenues. We strive to actively manage our properties in order to maintain high occupancy levels and strong retail mixes.

We do not hesitate to turn over space and replace retailers whose business models are no longer relevant with successful retailers who offer a much more relevant retail offering. This active management of our portfolio creates growth opportunities for Plaza.

We are now seeing a notable increase in acquisition development and leasing momentum across our geography, retail centers that require our expertise are starting to be marketed for sale and this should provide acquisition and redevelopment opportunities for Plaza. We're also continuing to pursue off market acquisitions.

We are seeing increased demand from major retailers, especially grocers and value retailers for new stores, leasing momentum for existing projects and our development and redevelopment has been strong. Rising construction costs are made a factor and we're looking to offset their effect with higher rents where possible and lower financing costs.

It is not always possible to move rents higher, but we are benefiting from lower interest rates and lower cap rates that help us to maintain our net development margins. Our financing sources are ready available at very attractive terms.

We are confident that our future prospects as we benefit from our highly engaged management teams capability to execute business plan, and our leasing and development teams ability to lease and develop high quality projects. Our core portfolio pharmacies, grocery stores, dollar stores, and other essential needs tenants that are performed exceptionally well over the last 16 months.

Our value retailers who have shown that they can prosper in open air centers during difficult times are large network of properties that are important part of any retailer strategy to sell products through multiple channels, and our strategy of being diversified across a wide geography with open air properties that often dominate within their community. 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 non-core assets, assets well over IFRS values. We are observing real demand from investors for quality grocery pharmacy in dollar store open air centers or strategically located single use sites.

This demand should eventually translate into higher IRS values for our assets. The Plaza team is excited to be focusing on growth again, and is looking forward to presenting continued growth in our per unit results.

I will now turn the call over to Jim Drake, Plaza's CFO. Jim?

Thank you, Michael. Despite some lingering impacts from the pandemic felt during the quarter, our operating environment has improved and continues to improve.

Our results this quarter reflects this. Our rent collection rates remain one of the highest among our retail peers at over 98% in Q2 2021 and July today.

We also continue to collect the vast majority of deferred rent in accordance with the agreed repayment schedules. During Q2 there are only nominal deferrals and abatements granted to accommodate certain tenants in jurisdictions that have experienced lock downs.

And we took a $50,000 bad debt provision. FFO and AFFO per unit for the quarter, which benefited from growth from developments, lower bad debt and admin expenses, as well as $3 million of lease termination fees were $12.07 and $10.08 respectively, up 65% and 59% respectively over the last year.

Year-to-date excluding bad debt and pandemic related write offs. Insurance proceeds and the impact of lease buyouts FFO and AFFO per unit were up 3% over last year.

Reported same-asset NOI year-to-date is up 1.3%. Excluding bad debt and pandemic related write offs and the impact of lease buyouts year-to-date same asset anyway would have been down 1.4%.

It is important to note though, that the second measure still includes certain other impacts from pandemic on NOI, such as its impact on occupancy. Our liquidity at quarter end totaled 4$2 million, including cash, operating line availability, and unused development and construction financing facilities.

We also had unencumbered assets with a value of approximately $21 million. Subsequent to quarter end, we increased liquidity by increasing our operating line limit from $46 million to $55 million.

For long term debt, we placed 26 million of mortgages year-to-date at a weighted average interest rate of 2.74%, and we continue to place debt at very attractive rates. As at June 30, we had $31 million of long-term mortgages rolling for the remainder of 2021.

Subsequent to quarter-end, we refinanced $3 million of same with $20 million of the remainder relating to grocery or pharmacy anchor properties, or with commitments to refinance already in place. And with an overall loan to value of approximately 45%, we are confident we will refi these mortgages.

During the quarter, we issued a $12 million convertible debenture via a private placement with demand for the issue being very strong. The proceeds were used to repay $9 million of returning debentures, with the remainder used to enhance liquidity and fund our development program.

Under our development program, during the quarter, we delivered on a few pads and expansions across our portfolio and close on land in bury by a 5050 joint venture. This land will be developed for a grocery-anchored strip in the future.

They also advanced a number of our projects and are actively pursuing numerous other development and acquisition opportunities across our geography. For asset sales, we sold a few QSRs during the quarter, bringing our net proceeds year-to-date to $7 million.

As Michael mentioned, we are seeing very strong demand for our small non-core assets at very attractive pricing. Our capital recycling program remains a very efficient source of capital, allowing us to reinvest the proceeds in new developments and redevelopments, which are generally grocery-anchored strips had healthy spreads over the hurdle rates on sales.

Finally on fair value, we recorded a $9 million gain on investment properties during the quarter as a result of cap rate compression and appraisals obtained. Our weighted average cap rate is now at 7.11%, which we believe remains very conservative.

As retail cap rates continue to stabilize, we do anticipate further fair value appreciation going forward. Those are the key points relating to our results for the quarter.

We will now open the lines for any questions. Operator?

Good morning, guys.

Good morning.

Good morning.

Would you be able to just talk a little bit more about your plans for Northern Avenue Plaza now that the lease buyout isn't done?

Yes. So what we were doing here is similar as what we did in Chicoutimi and Brockville.

We took back large Sears spaces. So we've taken back the large Lowe's premises, and it will be divided up into some multiple units.

About half of it is now leased. And construction will start here in the next 60 days.

So instead of seeing one large box store, you'll be seeing probably about four or five different retailers taking up most of the space. And again, just creating a strip center visual if you wish as opposed to a box store.

Okay, great. And what would the maybe the timeline for construction be there?

For this project - so the first phase is retaking the box store, it's going to take about probably about 12 months. There are also some pad opportunities that are being pursued.

And we are also reorganizing some of the existing CRU space as we speak. So this project is probably 12 to 18 months to finish.

Okay, that makes sense. And then I guess just broadly speaking, looking at the transaction market, from your perspective, I mean, we've seen pretty strong demand for whether it be grocery-anchored or just open air retail strips in the market so far this year.

So I'm just wondering, in terms of your portfolio, do you see a lot more opportunity to complete some dispositions. And then on the other side of that, you mentioned that you're more focused on growth at the moment.

Could you just speak a little bit about what you're seeing in terms of acquisition opportunities?

Okay. So, first point, in terms of disposition, I don't think you're going to be seeing us selling any of our pharmacies or grocery properties that to us is very, very core.

What we have been selling very successfully are some of the old KFC sites where highest and best use is not a quick service restaurant. That's been a very good business for us.

We've also converted a number of these KFCs into other uses, financial institutions, cannabis stores, etc. We're selling some of these because it's a good capital recycling opportunity.

We don't - it's not core to our business. So dispositions are going to be well controlled, I don't think you're going to see us doing any kind of material disposition, and certainly not looking to sell the core assets.

So what's really interesting today versus six or seven months ago, I thought by the end of 2020, we start to see a lot of redevelopment opportunities, and you look back, we really didn't, but now we are definitely seeing that. And we do have some different product under contract or about to go under contract, which would be either a mall to open air conversion.

So those are good meaty deals for us. And then we're also have doing some due diligence on box stores to strip conversion.

So we would buy a box store, would peel off the front, and then return it with multiple tenants. So a little bit like we talked about a few minutes ago, but just a different location and a different sort of variation on the same theme.

So that answers your question.

Yes, it definitely does. That's very helpful.

Thanks. And I'll turn it back.

Thanks. Good morning.

Good morning.

Good morning.

Just wanted to confirm about the lease buyout this quarter was all on the Northern Avenue lock tenant space.

Yes, it was. Vast majority of it was.

Okay. Thanks.

And then I guess - to end your commentary Michael, you noted the cost and inflation pressures? How would you say that's affected your yield expectations?

It's interesting. We've awarded a number of contracts, and we've kind of skated through.

We're wrestling with one right now, where I'm not very happy with the numbers. And that's forced us to go back sometimes to the retailer.

But there's definitely pressure out there. And there's more than just price pressure, there's delivery issues.

So that's a challenge. Because we've committed to delivering, and all of a sudden, you're not able to get the materials and we have to go back to the retailer, and in fact organize some more time.

So that's creating some problems. And that means your project takes longer to organize.

So I think it's going to have some impact on yields. So like I said, interest rates remain very, very, very low.

And we think evaluations are going up, it's going to make up for some of the price inflation, but not all of it. It means we're going to have to settle for some lower yields in certain circumstances.

And those circumstances we're making very, very good returns, and we'll continue to do so. So its project-by-project related from our experience.

Okay, that's all the questions I had. Thank you.

Thank you.

Thank you.

Well, thank you, operator.