CT Real Estate Investment Trust : Q1 2022 Conference Call Transcript

CT REIT First Quarter 2022 Earnings Conference Call

Tuesday, May 10, 2022 - 8:00 AM ET

DISCLAIMER

The information contained in this transcript is a textual representation of CT REIT's (the "REIT") Q1 2022 results conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. The information set out in this transcript is current only as of the date of the webcast and may be replaced by more current information. The REIT does not undertake to update the information, whether as a result of new information, future events or otherwise. In no way does the REIT assume any responsibility for any investment or other decisions made based upon the information provided on the REIT's web site or in this transcript. Users are advised to review the webcast (available at www.ctreit.com) itself and the REIT's regulatory filings before making any investment or other decisions.

FORWARD-LOOKING INFORMATION

This document contains forward-looking statements that involve a number of risks and uncertainties, including statements regarding the outlook for CT REIT's business and results of operations.

Forward-looking statements are provided for the purposes of providing information about CT REIT's future outlook and anticipated events or results and may include statements regarding known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those indicated. Such factors include but are not limited to: general economic conditions; financial position; business strategy; availability of acquisition opportunities; budgets; capital expenditures; financial results, including fair value adjustments and cash flow assumptions upon which they are based; cash and liquidity; taxes; and plans and objectives of or involving CT REIT. In addition, the effects of the coronavirus (COVID-19) pandemic, including variants of concern and any future waves, create additional uncertainties. Statements regarding future acquisitions, developments, distributions, results, performance, achievements, and prospects or opportunities for CT REIT or the real estate industry are forward-looking statements. In some cases, forward-looking information can be identified by such terms such as "may", "might", "will", "could", "should", "would", "occur", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue", "likely", "schedule", or the negative thereof or other similar expressions concerning matters that are not historical facts.

CT REIT has based these forward-looking statements on factors and assumptions about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. Such factors and assumptions include but are not limited to: that the Canadian economy will stabilize over the next 12 months and inflation will remain relatively low, despite government stimulus; that tax laws will remain unchanged; that the REIT will continue to manage its liquidity and debt covenants; that conditions within the real estate market, including competition for acquisitions, will normalize to historical levels in the near- to medium-term; that Canadian capital markets will provide CT REIT with access to equity and/or debt at reasonable rates when required; and that Canadian Tire Corporation Limited (CTC) will continue its involvement with CT REIT on the basis described in its 2021Annual Information Form.

Although the forward-looking statements contained herein are based upon assumptions that management of CT REIT believes are reasonable, based on information currently available to management, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond the REIT's control, that may cause CT REIT's, or the industry's, actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the factors discussed in section 12 of the REIT's 2021 Q4 Management Discussion and Analysis and under the "Risk Factors" section of CT REIT's 2021 Annual Information Form.

For more information on the risks, uncertainties and assumptions that could cause CT REIT's actual results to differ from current expectations, please also refer to CT REIT's public filings available on SEDAR at www.sedar.comand by a link at www.ctreit.com.

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CT REIT First Quarter 2022 Earnings Conference Call

Tuesday, May 10, 2022 - 8:00 AM ET

CT REIT cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also materially and adversely affect its results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. Statements that include forward-looking information do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on CT REIT's business. For example, they do not include the effect of any dispositions, acquisitions, asset write-downs or other charges announced or occurring after such statements are made.

The forward-looking information contained herein is based on certain factors and assumptions made as of the date hereof or the date of the relevant document incorporated herein by reference, as applicable. CT REIT does not undertake to update the forward-looking information, whether written or oral, that may be made from time to time by it or on its behalf, to reflect new information, future events or otherwise, except as required by applicable securities laws.

May 10, 2022

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CT REIT First Quarter 2022 Earnings Conference Call Tuesday, May 10, 2022 - 8:00 AM ET

C O R P O R A T E P A R T I C I P A N T S

Ken Silver

Chief Executive Officer

Kevin Salsberg

President and Chief Operating Officer

Lesley Gibson

Chief Financial Officer

I will now turn the call over to Ken Silver, Chief Executive Officer of CT REIT.

Ken?

Ken Silver, Chief Executive Officer

Thank you, Operator, and good morning everyone. We're very pleased to welcome you to CT REIT's first quarter 2022 investor conference call.

C O N F E R E N C E C A L L P A R T I C I P A N T S

Jenny Ma

BMO Capital Markets

Pammi Bir

RBC Capital Markets

Himanshu Gupta

Scotiabank

Tal Wooley

National Bank Financial

Sam Damiani

TD Securities

P R E S E N T A T I O N

Operator

At this time, I would like to welcome everyone to CT REIT's Q1 2022 Earnings Results Conference Call.

The speakers on the call today are Ken Silver, Chief Executive Officer of CT REIT; Kevin Salsberg, President and Chief Operating Officer of CT REIT; and Lesley Gibson, Chief Financial Officer of CT REIT.

Today's discussion may include forward-looking statements. Such statements are based on Management's assumptions and beliefs. These forward- looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see CT REIT's public filings for a discussion of these risk factors, which are included in its 2021 Management's Discussion and Analysis and 2021 Annual Information Form, which can be found on CT REIT's website and on SEDAR.

As this marks my last call as CEO before my retirement at the end of the month, I'll leave the bulk of the commentary on the quarter to Kevin and Lesley and share with you some departing thoughts.

I couldn't imagine a better time to complete our succession plan. As you've seen throughout the pandemic, and as you will hear most recently in Q1, the business is performing well and our balance sheet and credit metrics are in great shape.

In Kevin Salsberg, we have an incoming President and CEO with terrific real estate investment, leasing, and development skills, and a deep background in public real estate markets. Take those skills, together with what is now an in-depth knowledge of Canadian Tire Corporation and its strategies, strong relationships, and shared values with CTC's Leadership team, and you have the perfect leader to take CT REIT into the future. Kevin will be heading up a highly-capable and agile team with a great track record of value creation.

The foundation of our prospects going forward remain solidly tied to CTC's growth plans, which is laid out in its recent Investor Day, include significant expansion of its real estate store network and supply chain, investments that CT REIT is already participating in. Our prospects beyond our core portfolio, including third-party acquisitions, intensification, and surfacing value in

underutilized assets remain largely untapped opportunities.

The confidence I'm projecting is shared by the Board of CT REIT both in its support of Kevin and in our strategic direction. This confidence was displayed with the announcement yesterday of another distribution increase, the ninth since our IPO, to take effect with the distribution to be declared in June. What better time to hand over the reins?

Kevin, over to you.

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CT REIT First Quarter 2022 Earnings Conference Call Tuesday, May 10, 2022 - 8:00 AM ET

Kevin Salsberg, President and Chief Operating Officer

Thanks, Ken, for the kind words, and good morning, everyone.

I can't imagine starting my remarks without talking about Ken and the tremendous legacy he leaves behind both at Canadian Tire and CT REIT. In his time with the Canadian Tire family, Ken has been responsible for many remarkable accomplishments. He was the architect of a new store network strategy that allowed Canadian Tire to successfully compete head-to-head with other new box- big box entrants to Canada. He was the point person on

1. new dealer contract which re-imagined the way Canadian Tire engaged with one of their largest stakeholders, a key contributor to setting the stage for one of the most productive periods in the Company's history, and he obviously not only led the charge to take CT REIT public, but has also been a great steward of the REIT's exceptional performance since that time.

Despite the fact that I'm six foot four, Ken leaves me with some big shoes to fill. I feel confident, however, in the REIT's ability to compete and outperform. Our business was created to deliver durable and growing results. Our privileged relationship with Canadian Tire provides us with an opportunity set and growth pipeline that is consistent and meaningful.

We have also significantly evolved our own capabilities since going public in 2013. At the time of our IPO, there were exactly two REIT employees that were primarily supported by a large team at Canadian Tire and by external service providers. Key functions since that time, though, have been internalized and new capabilities added. Our team now numbers over 60 talented real estate, legal, finance, and accounting professionals, and is one of the strongest and most capable in the industry, and I'm pleased to report that our cost structure has remained one of the leanest in the sector.

There has been one recent addition at the REIT that I would be remiss if I did not call out. I want to welcome Jodi Shpigel to our Management team as Senior Vice President, Real Estate. I know that Jodi will be a great addition to the group, and I'm positive that her skill set and experience will only serve to further enhance the way we work and our ability to execute on our strategy.

Lesley will go into the details of the quarter shortly. As she will note, our results were, once again, strong. Our balance sheet remains in great shape, and with our most recent unsecured debenture refinancing, we have now

taken all of our public unsecured debenture maturities off the table until 2025, thereby significantly reducing interest rate related risk, a key achievement given the context of today's markets, and our 99.3 percent occupancy rate, conservative payout ratio, and strong rent collections all remain at very healthy levels.

It is based on this solid foundation, our positive outlook, and the strength of our team that our Board approved another distribution increase, our ninth since going public eight-and-a-half years ago. The distribution increase of

3.4 percent will be effective with the July 22-2022 payment to unit holders. I think it is also important to highlight that since our IPO, we have increased our distributions by more than 33 percent.

We also continue to work closely with our largest tenant and majority unit holder on delivering their recently- announced enhanced investment plans in both their store network and supply chain.

As highlighted in our press release yesterday, we were pleased to announce five new investments this quarter totalling $60 million, which, once completed, will add an incremental 286,000 square feet of GLA to the portfolio. The new projects include the acquisition of land and the vend-in of an existing Canadian Tire store in Kingston, Ontario; the acquisition of land from a third party adjacent to a REIT-owned property and the expansion of an existing Canadian Tire store in Napanee, Ontario; the acquisition of land from a third party for the development of a new Canadian Tire store in Sherbrooke, Quebec; the vend-in of land adjacent to an existing REIT-owned property and the expansion of an existing Canadian Tire store in Invermere, BC; and finally, the expansion of a Canadian Tire store in Orleans, Ontario.

At the end of the quarter, CT REIT had 29 properties that were at various stages of development, with five projects currently expected to be completed in Q2 of this year. The projects in our development pipeline represent a total committed investment of approximately $380 million upon completion, $83 million of which has already been spent and $162 million of which we anticipate will be spent in the next 12 months. Upon completion, these projects will add a total incremental gross leasable area of close to

1.4 million square feet to the portfolio, 72 percent of which had been pre-leased at quarter-end, and nearly half of which consists of development related to industrial assets.

As a further update on the new 350,000 square foot net zero distribution centre that we are developing in Calgary, Alberta, I am happy to report that, subsequent to the quarter-end, Canadian Tire has now committed to leasing

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CT REIT First Quarter 2022 Earnings Conference Call Tuesday, May 10, 2022 - 8:00 AM ET

the entire facility and will take occupancy upon its completion in Q4 2023. Factoring in this leasing update, our 1.4 million square foot development pipeline is now 97 percent pre-leased.

As we have discussed with you previously, we also continue to work proactively to extend leases with Canadian Tire. To the extent possible, this activity provides increased certainty around lease turnover and allows us to avoid temporary vacancy and leasing Capex for the most part, and securing continual annual rent escalations fosters ongoing growth and cash flows. In the quarter, we completed agreements with CTC to extend the leases of three Canadian Tire stores.

As we work towards the final days of transition between Ken and myself, I would like to thank him personally for his mentorship, guidance, and friendship over the last six years. They have meant a great deal to me, and I will certainly do my best to fill those shoes I discussed earlier and to continue to build off the amazing base he helped to create here at CT REIT.

With that, I will turn it over to Lesley to review our financial results.

Lesley Gibson, Chief Financial Officer

Thanks, Kevin, and good morning, everyone.

As Ken and Kevin have highlighted, it was a strong first quarter, and we are very pleased with the results delivered by the REIT.

First quarter AFFO per unit on a diluted basis was $0.278, an increase of 1.8 percent compared to the Q1 of 2021. NOI variances were partially offset by higher interest expense due to prepayment charges associated with the completion of our debenture refinancing and increased personnel costs, including those relating to CEO transition. Excluding these one-time costs, AFFO was up 3.8 percent.

Diluted FFO per unit for the quarter was $0.307, a slight decrease compared to $0.308 in Q1 of 2021 as the growth in units outpaced the growth in FFO.

Net operating income was $102.8 million for the quarter, an increase of 3.8 percent or $3.8 million compared to Q1 last year. This NOI growth was comprised primarily of 2.3 percent growth in same-store basis and 2.5 percent growth on a same-property basis.

The same-store NOI for the quarter grew by $2.3 million or 2.3 percent as a result of contractual annual rent escalations which contributed nearly $1.2 million, including the 1.5 percent average annual rent escalation contained within our Canadian Tire leases, with the balance of the growth from the continued recovery of maintenance capital and related interest carry, along with no credit losses recorded in the quarter.

In the first quarter, adjusted G&A expenses as a percentage of property revenue were 3.2 percent, which was above the 2.8 percent in Q1 2021. As we pointed out last quarter, the accelerated amortization of long-term compensation costs related to CEO transition will run through the P&L and drive slightly higher G&A expenses, which amounted to $0.6 million in Q1 and will continue through Q2. Excluding these transition costs, G&A as a percentage of property revenue would have been 2.8 percent, in line with Q1 of 2021.

The REIT recorded a fair value increase of $22.1 million on our investment properties for the quarter of-the first quarter of 2022. The increase in the fair value adjustment on investment properties was mainly driven by continued slight compression to the investment metrics within the portfolio based on recent market activity.

Distributions in the quarter were $0.210, or 4.6 percent higher than the first quarter of 2021 due to the increase in distribution paid since last July, resulting in an FFO payout ratio of about 75.5 percent, which continues to be within our targeted range.

Now, turning to the balance sheet, our debt metrics remain solid, with interest coverage ratio of 3.57 times in Q1 2022 compared to 3.68 times in the first quarter of 2021. The decrease in the interest coverage ratio is primarily due to the onetime $750,000 debenture prepayment penalty included within interest and financing charges, which is partly offset by the growth in EBIT fair value.

CT REIT's indebtedness ratio has also improved, and was 40.9 percent at the end of Q1 compared to 41.2 percent as at December 31, 2021. The decrease in the ratio was due to the increase in the fair value adjustments made to the properties, as well as acquisition intensification development activities exceeding the growth in total indebtedness.

With the successful issuance of $250 million of unsecured debentures at 3.03 percent for a seven-year term during the early part of the quarter, we completed the early refinancing of our obligations well ahead of the recent run-up in rates. This leaves us in a strong liquidity

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