Plaza Retail REIT

Thank you, operator. Good morning, everyone and thank you for joining us on our Q4 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 them, 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 December 31, 2021, which are available on our website and on SEDAR at www.sedar.com. We will also refer to non-GAAP financial measures during the call today.

For more information, please refer to the non-GAAP financial measures discussed and explained in Parts 1 and 8 respectively of the MD&A for the period ending December 31, 2021. I will now turn the call over to Michael Zakuta, Plaza’s President and CEO.

Michael?

Thank you, Kim. Good afternoon.

We are very pleased with our strong results for the year. We generated solid growth in our key performance measures, including FFO per unit, which is up significantly over both 2020 and pre-pandemic 2019.

Our performance in 2021 was driven by the resilience of our tenants, our portfolio, and our team. Plaza established itself over two decades ago by identifying and executing development and redevelopment opportunities primarily for grocery pharmacy and essential needs anchored open air projects in primary, secondary and tertiary markets throughout Eastern Canada.

Plaza’s strategy of being diversified across a wide geography includes having a dominant presence in secondary and tertiary markets. Although our properties performed particularly well over the last year, our pursuit of assets in these markets was not born during the COVID-19 pandemic.

We have long been a forward-thinking developer that sees the value in these markets and recognize their still untapped potential. Plaza knows these markets well and has an established track record of securing dominant locations for retailers.

Plaza has and will continue to capitalize on opportunities to develop assets in primary markets when they arise. However, our focus on investing in strong secondary and tertiary markets has served Plaza well and we believe it will continue to do so in the future.

Plaza is seeing more opportunities than ever across Eastern Canada. We have the capital, infrastructure, experience, team and vision necessary to realize on these opportunities.

We are observing growing interest from investors for essential needs, value and convenience assets such as ours. Capitalization rates for these assets are compressing and we will continue to see further write-ups in our IFRS values as transaction data establishes lower cap rates for our assets.

These value increases combined with our development program will lead to continued per unit growth in our NAV. As a result of our strategy, we have irreplaceable assets leads to two strong covenant retailers and a combination of primary, secondary and tertiary markets.

These assets have long been underappreciated. It has taken an unprecedented pandemic to start to highlight their value.

We are very optimistic about our future for a number of reasons. First, leasing activity for our developments, redevelopments and existing centers is strong, especially with essential needs and value retailers as well as quick-service restaurants.

Year-to-date, we have leased over 1.342 million square feet, 1,047,000 square feet for renewals, 180,000 square feet for new projects, and 115,000 square feet for backfilling of vacant space. Second, our current development redevelopment projects are progressing well.

You can see a sampling in our Q4 presentation that is now posted on our website. Third, our development pipeline has grown largely due to new demand from our core retailers and the availability of opportunities.

Fourth, the attrition of weaker retailers and the resulting decrease in occupancy that we experienced in 2020 – early 2021 is largely complete. Our committed occupancy now exceeds pre-pandemic levels.

Fifth, we continued to finance our projects and refinance our existing properties at historically low long-term interest rates. Finally, we are being opportunistic as we sell non-core assets at robust prices and invest the sales proceeds into much higher yielding new projects.

There is a lot of positive momentum for our business. We are looking forward to an exciting 2022 and beyond.

I will now turn the call over to Jim Drake, Plaza’s CFO. Jim, you are on.

Thank you, Michael. Our operating environment has continued to improve and we are effectively at levels equal to or exceeding pre-pandemic.

Occupancy, annual same-asset NOI, FFO and AFFO per unit, and payout ratios have all improved versus pre-pandemic levels. Overall occupancy – sorry overall committed occupancy is up 80 bps versus last year, now at 96.5%.

Same-asset NOI is up 1.2% over the prior year. Annual FFO and AFFO per unit, which benefited from growth from same assets and developments, lease buyouts, lower admin expenses and finance costs, were up 21% and 15% respectively over last year.

And our annual payout ratios have improved significantly as well at 65% of FFO and 77% of AFFO. Our rent collection remains high at over 99% for the entire year and we took a small bad debt provision of just over 100,000 during Q4.

Liquidity at year end totaled $65 million, including cash, operating line and unused development and construction facilities. We also have $21 million of unencumbered assets.

For long-term debt, we placed $74 million of mortgages during the year at a weighted average interest rate of 3%. We have $38 million of long-term mortgages maturing in 2022 with a weighted average rate of approximately 4%.

Of these mortgages, we already have $6 million committed with closing shortly and $18 million related to freestanding pharmacies. The loan to value on these mortgages is also below 40%.

So, we are very confident we will be able to refinance these mortgages at very attractive rates. We have $6 million unsecured debenture maturing at the end of this month and we will renew approximately $3 million of this issue for 5 years on the same terms.

Under our development program, we continue to advance the number of projects. And during the year, we completed a few expansions and pads as well as Phase 1 of Hogan Court, a grocery anchored development in Halifax.

In Q4, we closed on two new projects in Quebec, a grocery-anchored strip in Drummondville, where we will lease-up space and expand the building, and a new ground-up development in Chicoutimi, with significant pre-leasing in place. On asset sales, we generated net proceeds of $13 million for the year from sales in non-core QSRs and excess land.

And subsequent to year end, we sold an additional non-core QSR for proceeds of $2 million. We are seeing very strong demand for our small non-core assets at very attractive pricing and in certain cases reflecting a higher and better use.

Our capital recycling program remains a very efficient source of equity allowing us to reinvest the proceeds in new projects, which are generally grocery anchored strips at very healthy spreads over the hurdle rates on the sales. Finally, on fair value, we recorded a $30 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 6.9%, which we believe remains conservative. And as Michael mentioned, with increased interest in assets such as ours, we expect further fair value write-ups in the coming quarters.

Those are the key points relating to our results for the quarter and the year. We will now open the lines for any questions.

Operator?

Thanks and good afternoon.

Hi, Jenny.

Hi, Jenny.

Congrats on a strong quarter and a strong year. I wanted to dig into the portfolio.

You mentioned some of the freestanding drugstore assets. I am just wondering if you can remind us how much of your portfolio you would classify as purely triple net?

Triple net, most of the leases are triple net, if you are referring specifically to freestanding pharmacies, I don’t have the number in front of me, but it would be 50 or 60 freestanding pharmacies.

Okay. And what about the rest of the portfolio, was that more characteristic of a typical strip center then on the leases?

Yes, absolutely. And the leases are even in the script center, they are still triple net in the vast majority of cases.

Okay. Would you be able to put a percentage of your portfolio, like is it more than 90% or more than half, give us a range of where it stands?

It’s over 90%, I would think.

Yes, absolutely.

Okay, perfect. Okay, that’s helpful.

And you mentioned a lot about cap rate compression and your asset types and looking at some potential opportunities in primary markets as they come up. But maybe if you could – could you talk to us about whether or not you have seen a change in the spread between cap rates on primary market assets versus the secondary, tertiary market assets that Plaza specializes in like has it always been a specific gap or do you find that with the increased interest in this asset type that, that spread is trying to close in?

I think the spreads, first of all, have followed downward. The primary market spreads, are they a little tighter today?

Maybe, because there is so little so little available, but I think you have seen it in all the market sizes, you have seen cap rate compression and you have probably seen a little tightening between a tertiary, secondary market and a primary market, but it’s hard to make that calculation.

Okay. Do you see more interest in the secondary and tertiary market assets because of the high demand for primary and maybe some investors are still looking for a little bit of a higher yield?

Yes, I think that’s a fair statement, I think there is greater interest as long as you have the right tenancy, the right product and a strong location. I think that’s the point that we are trying to make that we do have some very, very strong locations, just because you are in a secondary, call it, strong secondary market, it’s very hard to put sites together and make financial sense of a deal.

Land can be expensive in the order of what you might see in a primary market. And very often, we are given a mandate to go out and find a site, it’s a lot more challenging than a lot of people would believe.

Okay, that’s fair. And then my last question before I turn it back is I look at the geographic distribution and Western Canada has never been a big focus for Plaza.

I think it’s always been in the low single-digits, but now we are kind of at that 1%ish mark. I am just wondering how you think about those assets that are out there?

Are you happy to keep them as is or does it make more sense to cleanly focus on Eastern and Atlantic Canada?

So we are very focused on our geography of Ontario all the way through Newfoundland. And if you recall, over the years, when we acquired Key REIT, we acquired a number of Western Canadian assets.

And we progressively disposed of those assets. A lot of them were KFC QSRs.

There were some small strips that we didn’t feel that we were well placed to operate effectively. And what we have left with in Western Canada are three freestanding Shoppers Drug Marts and that to us is very, very core.

I think we have 75 or 76 Shoppers Drug Marts and we are not in the business of selling that type of asset. So, we have kept them and they are very good [indiscernible].

Okay, I assume they are not terribly management intensive.

No, there is no management.

Okay. I mean, if cap rates continue to compress is there a point where you might consider selling those ones?

I know we are talking small potatoes here. I am just wondering when you look at a portfolio focus, is it something that you wouldn’t mind disposing of or do you want to keep a bit of a presence and perhaps it’s an area you could continue growing down the road?

Well, again, our strategy has always been to keep these types of assets. Because we know, because we have developed so many of them, we know how hard it is to put together.

And once you have it, they are very, very good. It’s very, very good real estate.

So, I don’t think that we would be a seller of those assets. We certainly have not considered that to-date.

And we have always looked at Western Canada, looked at opportunities, but never felt comfortable. And then we sort of also look at the opportunities that we have, whether it’s across Atlantic Canada, Quebec or Ontario, why should we go into an area in which we don’t have expertise?

When we can – we have lots of growth opportunities within the geography that we have a lot of strength and a lot of market knowledge. So that’s been the strategy to-date.

Okay, great. Well, that’s good color.

Thank you very much. I will turn it back.

Thank you.

Thank you.

Thanks and good afternoon.

Good afternoon.

Michael, as you are acquiring and sourcing land and redevelopment properties and looking at the supply side, is it a continuation of activity that was sort of on pause during the pandemic or from your viewpoint, has the size of the opportunity actually expanded as a result of the pandemic?

I think there are more opportunities as a result of the pandemic. So, the recent deals that that we have acquired are all deals that would have originated during the pandemic.

I think that whatever we were running with before the pandemic, we did, we closed on, we did our thing. And now we are definitely seeing more opportunities across a very wide geography for the types of deals that we wish to do.

Is it because of the pandemic, probably, to a certain extent, it’s also probably about a shift in focus for a lot of large landlords, who are very, very, very focused on urban style properties. I think that benefits us, also, the volatility of retail, certainly has probably driven some people out of the market, and therefore creating more opportunity for us.

Okay, so there are net new opportunities, correct?

Definitely net new opportunities. Yes.

Okay. And then I just wanted to ask about the two replacement government support programs.

The tourism related and the hardest hit business recovery. Just wondering what’s the participation like this with similar group of tenants from the previous program, or if it’s different or just a smaller number there, any color there?

There is – I don’t – we don’t see through the government support programs anymore. If you call it early on, the things – the government programs are run through the landlord.

Now they are done directly between government and the tenant. So, we do have some communication with some tenants saying, I am waiting on my government funding.

But it’s been pretty much not an important part of the business over the last few quarters. You have definitely seen a serious rebound, I was looking at sales figures for 12 months running to end of January, and there has definitely been a significant improvement in many, many areas, even some of the areas that were hit hard by the pandemic over the last year.

So, we don’t have a strong feel. Jim, I don’t know if you have anything – any other insight?

I think you have covered it, Michael that I would agree that participation is probably much lower than it was in the more widespread programs that preceded these programs. And given that, we are not seeing any real impact on our tenants either.

We are not seeing increased bankruptcies. We are not seeing increased AR.

So, that’s a great time, and plays into Michael’s comments on tenant sales.

Okay, sounds good. And just last question for me is on Jim, I guess costs were a bit lower due to the pandemic.

So, just wondering for ‘22 and ‘23, how to think about [indiscernible] does it revert that closure to the, I guess $9 million a year level?

No, I mean, maybe I will let Jim comment on that. I don’t think it’s going to go back up.

I think the pandemic has changed things. We did an early retirement program, which lead to savings.

We are definitely doing less travel for business. There will be an increase in G&A, for sure.

But it won’t be anywhere near the levels that we were seeing pre-pandemic. Jim, I don’t know if you have anything?

Yes, absolutely. I absolutely agreed.

2021 is really sort of a normalized year. We will see a little bit additional travel.

But the dollar amount is going to be nominal.

Okay, great. Thank you.

Thank you.

Thank you.

Hi Mike.

Hi Jim.

Hi Kim and Jim. My question was in regards to the costs of development.

All we hear about is how costs are rising in construction materials and so on? And are your returns going to be the same, because of these rising costs?

Are you able to pass that on in rents to the tenant?

It’s very, very much deal specific. So, we have had some bad surprises, we have had some good surprises on costs.

And I have said this many times, you do work over a very large geography. And it’s really interesting to see how costs for a similar product can vary.

It depends how hungry some of the contractors are. We are clearly budgeting much higher numbers and we are getting better rents.

So, returns are decent. I don’t think that they are – are they weakened a little bit, maybe.

It depends on the final outcome. But we have definitely had discussions with some of our key retailers.

And say guys, you got to pay more. And they say we understand.

And you are seeing some higher rent because of higher costs.

So, maybe I will just add, maybe there was a bit of pressure on the unlevered return. But we – as I mentioned, we are borrowing money at extremely low rates.

We wouldn’t have underwrote a project 2 years ago with 3% interest rate. So, our levered returns had been pretty stable.

And that’s ultimately what we are looking at is our levered return success.

Okay. The last question would be in regards to you are speaking about lots of opportunities come out of the pandemic, quite a few enclosed malls are suffering and probably lots of empty space.

Do you envision ever taking a punch into that and taking advantage of some of the distress that’s in the closed mall area?

I think I have said this previously on these calls. I think that’s a domain for private equity, and not a public REIT.

And when I say that, I mean operating an enclosed mall as an enclosed mall. So, we are always looking and we are pursuing opportunities to acquire an enclosed mall, but transform it or simplify it into an open air centre.

That to us is very good business. And when we are chasing that – we are always chasing that.

And but the majority of malls would not fit for our strategy of making that transformation. There are still a number them that shouldn’t be enclosed malls, they should be strips.

And that’s the kind of product we want to buy. But are we going to go and buy malls and operate fashion malls, I don’t think that’s where we want to be.

That’s not our core business. And I think it’s highly volatile.

And I would rather stick to our solid essential needs open air centre business. That’s rock solid and we will leave the enclosed mall volatility to others.

Thanks, guys.

Thank you.

Thank you.

Hi, good afternoon.

Good afternoon.

Good afternoon.

I have got one question here on the cost recovery clauses. So, the MD&A discloses cost recovery clauses linked to CPI.

So, I am just wondering if there are any caps to those recoveries? And if so, if that would be expected to be a headwind in ‘22, with CPI running at these elevated levels?

If there any caps that are not material, there might be two out of our, I don’t know 1,000 plus leases, there may be one or two. That’s generally not how it’s structured.

Okay, great. That’s it for me.

Thank you.

Thank you.

Thank you.

Thank you, operator.