Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Choice Properties Real Estate Investment Trust (PPRQF, Financial) maintained near full occupancy at 98% during the quarter.
- Achieved strong leasing spreads of 48.2% and delivered same asset cash NOI growth of 4.4%.
- Successfully completed approximately $114 million in total real estate transactions, including the acquisition of two grocery-anchored retail assets worth $83 million.
- Received a credit rating upgrade from Standard & Poor's to BBB plus, citing the strength of grocery-anchored retail properties and strategic relationship with Loblaw.
- Strong financial performance with reported funds from operations (FFO) for the second quarter at $184.7 million or $0.255 per unit, reflecting an increase of approximately 0.4% from the second quarter of 2023.
Negative Points
- FFO for the quarter was impacted by the timing of lease termination income and certain one-time costs related to operational efficiency.
- Certain discretionary retail tenants are impacted by the overall health of the Canadian consumer, creating pressure for tenants whose businesses rely on discretionary spending.
- Despite strong performance, the interest rate environment remains volatile, and a substantial drop in long-term interest rates is not foreseen in the near future.
- The industrial portfolio is expected to see a modest decline in occupancy due to a few known vacancies, which were contemplated in the company's plans and outlook.
- The restructuring costs related to the outsourcing of a portion of the company's operational accounting platform are anticipated to be approximately $7 million for 2024.
Q & A Highlights
Q: What types of tenants are on your watch list, and what's the appetite for backfilling like?
A: The backfill is quite strong. We have very few tenants on our watch list as most are necessity-based, such as grocery stores. The issues are mainly with discretionary spending tenants like big box fashion and mid-price sit-down restaurants. However, we are not facing significant challenges in backfilling these spaces.
Q: Could you quantify the expected impact on occupancy and same-property NOI from non-renewals in the industrial sector?
A: We expect around 200,000 square feet of potential vacancy, which will reduce occupancy from about 98.8% to the high 97% range. This was planned for and is included in our outlook.
Q: How do you see the balance of the year evolving in terms of Loblaw transactions?
A: We are aiming closer to the $150 million mark, with transactions starting in Q3 and some potentially trickling into Q4.
Q: What drove the 3.5% cost increase in the industrial development pipeline, and how does it affect yields?
A: The increase was due to minor tweaks in internal allocations, interest, G&A, and phasing of master plan costs. The yields remain in line with previous disclosures.
Q: Are you getting closer to starting another industrial project, either with or without preleasing?
A: We are actively marketing the site and expect to be in a position to start construction in Q1 or Q2 of 2025, depending on market conditions.
Q: Can you provide more details on the Nautical Lands Group projects?
A: They are building rental communities focused on adults 55 and older. These are mid-rise buildings, generally around six stories, and are complementary to our retail sites. We have already transferred one of the six ground leases, with the remaining five expected over the next two years.
Q: What are the dynamics in the industrial leasing market, and are you offering any concessions?
A: We are not offering any concessions and continue to see strong interest. Our retention and rent spreads remain high, reflecting the strength of our locations.
Q: What is the outlook for capital recycling for the rest of the year?
A: We aim to balance acquisitions and dispositions, expecting around $200 million for each by the end of the year.
Q: How are the Loblaw Industrial leases structured, and what was the lift on industrial versus retail in the 8.4% average spread achieved?
A: We had one industrial lease with a 10% spread. The structure is similar to retail leases.
Q: What is the current state of the transaction market, and how are you managing financing for buyers?
A: The market remains similar to last quarter with a significant bid-ask spread. We focus on the private market, and buyers are generally able to secure financing. In some cases, we provide short-term vendor take-back (VTB) financing, typically for one year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
