Morguard Actual Property Funding Belief (OTC:MGRUF) Q1 2023 Outcomes Convention Name April 27, 2023 4:00 PM ET
Firm Members
Andrew Tamlin – CFO
Todd Febbo – VP of Jap Asset Managemen
Convention Name Members
Jonathan Kelcher – TD Securities
Tom Callaghan – RBC Capital
Operator
Good afternoon, women and gents, and Welcome to the Morguard Actual Property Funding Belief First Quarter Convention Name. [Operator Instructions].
This name is being recorded on Thursday, April 27, 2023, and I’d now like to show the convention over to Mr. Andrew Tamlin. Please go forward.
Andrew Tamlin
Good afternoon, everybody. My identify is Andrew Tamlin, Chief Monetary Officer of Morguard REIT. Welcome to Morguard REIT’s first quarter 2023 earnings convention name. I’m joined this afternoon by John Ginnis, Assistant Vice President of Retail Asset Administration; Tom Johnston, Senior VP of Western Asset Administration; Todd Febbo, VP of Jap Asset Administration, together with Ray Cahill, CEO and Chairman of the Board. Thanks all for taking the time to hitch the decision.
Earlier than we soar into the decision, I wish to level out that our feedback will largely check with the primary quarter 2023 MD&A and monetary statements, which have been posted to our Web page. I refer you particularly to the cautionary language on the entrance of the MD&A, which might additionally apply to any feedback that we’d make on the decision.
General, we’re once more happy with the primary quarter outcomes, which confirmed continued enchancment in the identical asset metrics on the year-over-year foundation.
Web working earnings for the quarter elevated 11% to $31.5 million in 2023 on account of a one-time property tax refund for one of many trusts and closed regional facilities within the quantity of $2.8 million, which associated to vacant area and area failed tenants equivalent to Goal. FFO for the quarter additionally elevated 9% to $16.3 million in 2023 in comparison with a yr in the past.
The identical asset internet working earnings for the primary quarter, excluding the property tax refund, improved 1.3% from a yr in the past void by a 9% enhance in identical asset outcomes for our enclosed mannequin portfolio. This represents the eighth quarter in a row the place now we have achieved improved identical asset outcomes on a year-over-year foundation.
Curiosity expense has elevated 13% to $14.7 million for the quarter on a year-over-year foundation. The influence of decrease debt and the quantity of $23 million on a year-over-year foundation has been offset by increased short-term opening prices because of the increased rate of interest atmosphere that we discover ourselves in.
Larger rate of interest prices on renewal prices of mortgages have additionally been an element. In keeping with year-end, the belief is roughly 18% of its debt is variable and the belief will proceed to observe this and would anticipate to see it considerably elevated within the close to future as effectively.
As talked about beforehand, our enclosed mannequin outcomes proceed to rebound from the downturn, we noticed underneath COVID. In the course of the quarter, we had a $21 million truthful worth loss on our actual property properties, which was virtually all attributable to extra conservative leasing assumptions on our workplace portfolio. This compares to a $25 million truthful worth acquire recorded a yr.
The REIT’s PCME or Working at Leasing Capital Reserve was established to be $25 million for the yr. Whereas we solely spent $3.6 million of the $6.3 million reserved this quarter, we predict elevated capital wants and future quarters into 2024 above the reserve quantities. This is because of each contractor delays from final yr, some catch-up and spending, in addition to some elevated leasing capital for upcoming renewals.
Our general occupancy ranges of 90% at March thirty first is down barely from a yr in the past. This compares to the proportion at the beginning of the pandemic, which is 93%. We’re seeing continued softness within the workplace leasing market. Nevertheless, there are pockets of exercise together with in Calgary and sure suburban workplace belongings. This speaks to the truth that normally we have been capable of hold tenancy at our high quality belongings. I additionally observe that we have had a single tenant industrial asset for which the tenant didn’t renew within the fourth quarter. We’re working to discover a new tenant for this asset.
And now for an replace on our leasing efforts. In 2023, there’s roughly 372,000 sq. ft in retail GLA coming due. We do anticipate that each retail tenant bigger than 5,000 sq. ft to resume their area. There’s additionally roughly 329,000 sq. ft in workplace area coming due in 2023, and we be ok with the overwhelming majority of this area as effectively. I do observe that there’s 13,000 sq. ft in Ottawa that will probably be vacated and additional 19,000 sq. ft at 77 Bore that was vacated on this previous quarter.
We are saying you now concern with the 40,000 sq. ft of business area renewing in 2023, which ought to be completed with the great uplift and charges. Leasing discussions for retail alternatives have positively picked up within the final yr as each present and potential tenants now have a greater deal with on what we anticipate going ahead. This has led to quite a few conversations about varied alternatives at our properties throughout the nation. Workplace leasing discussions alternatively whereas gaining some momentum are nonetheless muted as tenants are nonetheless attempting to determine what their workplace wants are over a long-term foundation in a post-COVID world.
Administration has had continued ongoing discussions with the provincial authorities tenant at Petroleum Plaza in Edmonton, which got here up for renewal on December thirty first, 2020, and is now in Overhold, whereas they’ve verbally informed us that they anticipate us to resume, they’ve sadly nonetheless been targeted on their response to the pandemic and different initiatives which has taken precedence. Our expertise is much like different Alberta landlords who’ve the provincial authorities as tenants. I do observe that this area has remained occupied over this complete timeframe.
Turning to financing and liquidity, the belief has $120 million in liquidity on the finish of the primary quarter and $316 million in unencumbered belongings. These [ph] numbers are very comparable from yr finish. Trying particularly at mortgage renewals, we had 4 mortgage renewals or financing up to now this yr with roughly $6 million within the financing proceeds. The belief does have elevated mortgage renewals over the 2023 and 2024, and we do anticipate that there will be restricted alternatives of up financings out there throughout this time.
We’re particularly happy with the outcomes from Pine Middle in Prince George, British Columbia. This mannequin could have a brand new Save-On Meals grocery retailer opening shortly, which has additionally led to leasing alternatives with discriminating tenants equivalent to Lululemon and Sephora together with others. whereas the development efforts with Save-On-Meals have seen delays, which isn’t unusual lately, {the marketplace} is worked up about all of those new tenants. We anticipate to have the ability to flip the Save-On-food area over to the tenant within the second. The addition of grocery additional compliments the sturdy anchor tenant profile on this mall.
Final quarter, the belief introduced that it had reached an settlement with Teamtown to transform the empty residence clothes shop area at Heritage City Middle in Calgary right into a 34,000 sq. foot retail retailer specializing in sporting items. The challenge price roughly $3 million from a landlord perspective and was accomplished within the first quarter of 2023. This area is now open. The truss has additionally introduced a refresh of the foyer and frontage of Rice Howard Place situated in Edmonton, which is able to price roughly $5 million. The belief owns 20% of this asset.
Wrapping up, we’re happy that the resiliency of our belongings and the improved outcomes and exercise ranges from our enclosed mall and retail phase. Whereas there nonetheless is room to develop to get again to pre-COVID outcomes, now we have seen optimistic leads to the final yr. We’re wanting ahead to continued optimistic leasing conversations for our belongings. Most of our enclosed malls stay dominant within the geographical space and our strip malls, that are largely grocery-anchored, have carried out effectively within the pandemic.
Past our retail belongings, now we have high-quality workplace buildings in Canada’s largest markets with a excessive diploma of presidency workplace tenants. We proceed to be optimistic about our enterprise and the target of constructing worth for our unit holders. We look ahead to continued executor technique. And thanks in your continued.
We’ll now open the ground to questions.
Query-and-Reply Session
Operator
[Operator Instructions] Your first query comes from Jonathan Kelcher from TD Cameron. Please go forward.
Jonathan Kelcher
Thanks, good afternoon. First query, simply on the workplace leasing facet. You stated you be ok with the remaining maturities this yr, and I assume aside from the 13,000 in Ottawa there, is there something bigger that you realize that that won’t be renewing?
Andrew Tamlin
No, that was actually all the pieces that I wished to spotlight from that perspective, Jonathan.
Jonathan Kelcher
Okay. After which what would your expectations be on renewal charges? What do you suppose the mark to market is in your workplace portfolio for what’s maturing this yr?
Andrew Tamlin
Todd, do you need to possibly cowl that?
Todd Febbo
Positive. So, the charges have been — they have been holding regular. The distinction is that the fee to do these charges is the place we’re having to usually give extra in TIs to compensate to maintain the charges up. So, we’re holding sturdy with our charges. So, they’ll hold as near that as attainable, however the inducements are likely to have creeped up because the market has softened.
Jonathan Kelcher
That was form of my subsequent query. What are you seeing when it comes to will increase in TIs and is it completely different from market to market?
Todd Febbo
It’s — there was definitely a creeping up, however it’s form of everywhere in the board nonetheless, sadly, it is powerful to slim all the way down to a selected pattern aside from it is increased than what it was beforehand. There’s actually no particular quantity that I may give it to you that may say that this represents the market, however I can say that it is persistently increased that is sadly the perfect. I can slim it down as a result of that’s actually actually what we’re seeing throughout the spectrum of the markets proper now. Not less than within the east and we will discuss in regards to the climate the West is any completely different, however the east the place I take care of it has been a different response to that over the three areas that I take care of.
Andrew Tamlin
Sure. I believe, it form of varies relying available on the market and the tenant, and the scenario. Proper. So far as attempting to cite mounts, Jonathan.
Jonathan Kelcher
Okay. Honest sufficient. Larger and internet efficient are — will probably be clearly down then somewhat bit, however you are holding face.
Andrew Tamlin
Right.
Operator
[Operator Instructions] The following one is from Tom Callaghan from RBC Capital Markets. Please ask your query.
Tom Callaghan
Hey, sorry, I believe I used to be on mute. Afternoon guys. Simply first one from me was simply on the retail facet of the portfolio. Simply questioning when it comes to the sequential drop in occupancy was that one thing particular like a lumpier tenant or simply form of a group of smaller leases?
Andrew Tamlin
Sure. There was no particular tenant. Tom, it was actually, I imply, you can form of chalk it as much as the — there’s at all times a little bit of a lower from Christmas as effectively. So simply quite a lot of small little issues.
Tom Callaghan
Bought it. After which possibly simply constructing on that and a few of your earlier feedback within the ready remarks, the place do you guys form of see portfolio occupancy trending right here over the subsequent form of two, three quarters?
Andrew Tamlin
Do you need to make a touch upon that John, from a retail perspective?
Unidentified Firm Consultant
Positive, Andrew, thanks very a lot, and admire the query. So, retail usually, in case you examine over the course of the final two years, we have truly held fairly regular when it comes to general occupancy and clearly, we went via troublesome instances in the summertime and later a part of 2020. However we have been fairly good when it comes to retaining portfolio occupancy throughout the board, whether or not it is enclosed malls or strip facilities.
In order Andrew famous, we normally see a tick in This autumn to symbolize some momentary inline leasing we do in our enclosed malls in anticipation of the Christmas season. However all in all, we have seen elevated demand, which is nice. Our strip portfolio’s been fairly constant as pertains to its occupancy, however the demand, and it varies throughout the nation extra so within the west than right here within the east, however I’d argue that portfolio occupancy from the retail perspective ought to might imply add or develop incrementally over the course of the calendar yr.
Tom Callaghan
Bought it. Thanks, that is useful. And possibly only one extra, one final one from me on the credit score facet, however you guys present some disclosure round this break up with respect to mortgage financings between form of the break up between banks, pensions, and insurance coverage corporations. Simply curious, have you ever guys seen any change in lending urge for food or maybe bifurcation amongst these teams, say over the previous form of six months?
Andrew Tamlin
No, not likely. I believe it is all we do attempt to have an excellent selection there, Tom. So, I’d proceed to say that we’ll attempt to have that selection as effectively, simply to combine issues up. However I’d say no actual change of observe.
Tom Callaghan
Okay obtained it. After which simply on form of remaining refinancing this yr, I believe, you had talked about final name, form of 50 ish to 60 ish % on LTVs. I assume that is form of nonetheless the goal for the rest?
Andrew Tamlin
Sure, it is, yeah.
Tom Callaghan
Bought it. Okay.
Operator
Your subsequent query is from Dr. Chow Chowed, a non-public investor. Please ask your query.
Unidentified Analyst
Thanks for taking my name. New on this week, and I’ve some questions. May you please let know what’s your present let asset worth, please? [ph]
Andrew Tamlin
Sorry, you are not coming via all that.
Unidentified Analyst
So, I stated, a brand new investor on this suite and I am attempting to grasp what’s your present internet asset worth. And you might be measure ratio, please.
Andrew Tamlin
Possibly I may — possibly you can attain out to me and I may clear a few of these questions after the very fact, if that is okay.
Unidentified Analyst
I stated, a brand new investor on this suite, and I need to know, what’s your present internet asset worth and your ratio, please?
Andrew Tamlin
Properly, the pay ratio is 37.5%.
Unidentified Analyst
37.5%. And what’s your internet asset worth, please?
Andrew Tamlin
The online asset worth is within the vary of $15 to $16.
Unidentified Analyst
Okay, so you probably have a internet asset worth within the vary of $15 to $16 and your inventory value has been — through the years, — how do you guys really feel about this in your long-term traders? When you might have a home, you personal a property that’s what $15 to $16 per share and it’s promoting at lower than $6 persistently. How do you guys really feel about this?
Andrew Tamlin
Properly, clearly there’s been an actual property downturn. I am not totally certain what you are wanting us to convey. We have simply gone via COVID. There’s macro-economic elements.
Operator
The following one is from [indiscernible] a shareholder. Please ask your query.
Unidentified Analyst
Hello, guys. Thanks for taking my query. I used to be simply questioning form of — in case you may remark usually about your priorities for the surplus capital that you’ve got throughout the REIT. The distribution is sub-15 % of your adjusted entrance stream from operations. I am simply pondering when it comes to form of price of financing is usually going inching up. I do not know what the weighted common rate of interest is at the moment, most likely 5%. Possibly getting near that and shifting up. So, I used to be simply curious how the administration crew thinks about between deleveraging or investing or, I do not know, unit buybacks. What are your priorities for no matter extra funds you might have throughout the REIT? Thanks.
Andrew Tamlin
Yeah, thanks in your query. We’re targeted on our debt proper now, so I do not see us, focusing an excessive amount of on buybacks. We have talked about elevated quantity of maturities and debt we will do over the subsequent yr or so. So, we will probably be targeted on that fairly than specializing in concern a bid purchases. There’s a modest quantity of improvement capital that we’re as effectively. However nothing that is going to be too excessive.
Unidentified Analyst
Okay. Thanks. So simply to make clear, in phrases, you are not form of planning to redeploy it into extra acquisitions or extra properties, it is simply getting your leverage down, is that proper?
Andrew Tamlin
Sure, we have not been too energetic on acquisitions in the previous couple of years, so I do not actually see us shifting forward with any acquisitions within the close to time period. The rest?
Unidentified Analyst
Nope. Thanks. That is it for me.
Operator
No additional questions right now. Sir, please proceed.
Andrew Tamlin
Okay. Thanks. Thanks, all people for becoming a member of the Q1 name and we’ll look ahead to speaking to all people subsequent quarter. Thanks.
Operator
Thanks. Girls and gents, the convention has now ended. Thanks all for collaborating, and name disconnect. Good bye.
