Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Primaris REIT (PMREF, Financial) reported a 6.8% growth in FFO per unit and increased guidance for FFO per unit and NOI for 2024.
- Occupancy rose more than 3% from a year earlier for both in-place and committed occupancy.
- Tenant average sales in the portfolio increased by more than 25% from Q2 2022 to Q2 2024.
- Primaris REIT (PMREF) acquired two of Canada's top 15 malls for $640 million in 2023 and is actively engaged in further acquisitions.
- The company received a BBB high, stable investment-grade credit rating from DBRS Morningstar.
Negative Points
- Higher interest expenses absorbed $0.145 per unit, impacting overall financial performance.
- The recovery ratios, although improving, are still below historical norms, indicating room for further improvement.
- The watchlist for tenants has not changed significantly, indicating potential risks with certain tenants whose sales growth has not kept up.
- The property tax recoveries are unpredictable and can cause fluctuations in financial results.
- The conversion of leases with preferred rental terms back to net leases is ongoing and may take another 12 to 24 months to complete.
Q & A Highlights
Q: Your commentary talked about a target occupancy of 96%, which I believe is up from 95% previously. What parts of the portfolio are driving your confidence to raise that target level?
A: Historically, we were at 95% to 96%. We have confidence we can get to the 96% level due to strong leasing activity, particularly with large-format tenants. On the CRU side, we are seeing a lot of new deals and space tweaking, which supports our confidence in achieving the 96% target. β Patrick Sullivan, President, COO, Trustee
Q: With the macro backdrop we're all facing, what are you seeing in terms of your watchlist for tenants? Are there any new points of pressure in your portfolio today?
A: The watchlist hasn't changed much in the last six months. Some tenants haven't kept up with sales growth, but there's no significant risk around them. Overall, tenant sales are still positive, and many are reporting their highest sales figures since opening. β Patrick Sullivan, President, COO, Trustee
Q: Can you elaborate on how enhanced pricing power works as you approach your target 96% occupancy?
A: We expect leasing spreads to remain high-single-digits even as we get closer to 96%. More competition for space, especially in high productivity malls, will help drive rents. The ability to replace low productivity tenants with high productivity ones will also contribute to higher spreads. β Patrick Sullivan, President, COO, Trustee and Rags Davloor, CFO
Q: Could you give us an idea of where the operating cost recovery ratio is now and how it compares to last quarter and year-over-year?
A: Currently, we're around 80% on the CAM side and close to 80% on the tax side, up from low-70s during pandemic lows. Our historical numbers are close to 100% on CAM and 92%-93% on tax. We have a long runway to get back to these levels, driven by occupancy and reducing variable rent leases. β Patrick Sullivan, President, COO, Trustee
Q: What would be the quantum of property tax recoveries in the quarterly results, and should we strip this out for the coming quarter?
A: The property tax recovery was a prior year adjustment due to a successful tax appeal. It was a one-time event, specific to Ontario, where tax appeals happen in arrears and take time to settle. We expect further prior year adjustments as we continue to settle appeals. β Patrick Sullivan, President, COO, Trustee and Alex Avery, CEO
Q: How does the acquisition of the grocery store at Conestoga Mall fit into your broader strategy?
A: The acquisition was strategic to control the whole property. While we have no specific plans, owning the entire site gives us flexibility for future redevelopment if needed. The opportunity was there, and it was a logical acquisition to make. β Alex Avery, CEO
Q: How much lower can the exposure to preferred rent structures go, and what is the potential timing to get there?
A: We're currently at 8.5%, down from historical numbers of around 5%-6%. We aim to get to 5% within 12 to 24 months, through converting tenants back to net leases or replacing them. β Patrick Sullivan, President, COO, Trustee
Q: The same-property guidance suggests stronger growth in the back half of the year. What are the key elements driving this?
A: The underlying trend in the business is around 5.9% growth, excluding prior year tax recoveries. We expect this trajectory to continue for the back half of the year, with some lumpiness in the financials. β Patrick Sullivan, President, COO, Trustee
Q: Can you give us a sense of the acquisition and disposition pipeline?
A: We have many discussions ongoing for both acquisitions and dispositions. The market transaction volumes are picking up, which bodes well for our disposition program. We are optimistic about getting some deals done this year. β Alex Avery, CEO
Q: How do you envision the longer-term capital structure relative to where it is today?
A: We like our current low payout ratio and low leverage structure, which delivers higher FFO per unit and NAV per unit growth. If not focused on acquisitions, we would lean more on NCIB activity. We don't anticipate changing this structure. β Alex Avery, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
