CT Real Estate Investment Trust : Q2 2022 Conference Call Transcript

CT REIT Second Quarter 2022 Earnings Results Conference Call

Tuesday, August 9, 2022 - 9:00 AM ET

DISCLAIMER

The information contained in this transcript is a textual representation of CT REIT's (the "REIT") Q2 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: whether the Canadian economy will stabilize and the timing and extent of further changes to inflation; 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; andthat 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.

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CT REIT Second Quarter 2022 Earnings Results Conference Call

Tuesday, August 9, 2022 - 9:00 AM ET

These risks and uncertainties include, among other things, the factors discussed in section 12 of the REIT's 2021 annual 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.

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.

August 9, 2022

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Canadian Tire Corporation - CT REIT Q2 2022 Earnings Results Conference Call Tuesday, August 9, 2022 - 9:00 AM ET

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

Kevin Salsberg

President and Chief Executive Officer

Lesley Gibson

Chief Financial Officer

Jodi Shpigel

Senior Vice President, Real Estate

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

Himanshu Gupta

Scotiabank

Tal Wooley

National Bank Financial

Jenny Ma

BMO Capital Markets

Pammi Bir

RBC Capital Markets

Sam Damiani

TD Securities

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

Operator

Good morning. My name is Valerie and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q2 2022 Earnings Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press then the number one on your telephone keypad. To withdraw your question, press and then the number 2. The speakers on today's call are Kevin Salsberg, President and Chief Executive Officer of CT REIT; Lesley Gibson, Chief Financial Officer of CT REIT; and Jodi Shpigel, Senior Vice President, Real Estate, 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 their 2021 MD&A and 2021 AIF, which can be found on CT REIT's website and on SEDAR.

I will now turn the call over to Kevin Salsberg, President and Chief Executive Officer of CT REIT.

Kevin?

Kevin Salsberg, President and Chief Executive Officer

Thank you, Valerie, and good morning, everyone. We're very pleased to welcome you to CT REIT's Second Quarter 2022 Investor conference call, which I feel fortunate to remind our listeners marks my first call as President and CEO.

As we have all witnessed since our last quarterly update, the overall economic picture has become increasingly more challenged and the global financial outlook even more uncertain. Central banks continue to increase rates, elevated levels of inflation persists, and the prospects for an economic slowdown seem more pronounced.

In the face of such an opaque market context, however, CT REIT continues to deliver strong and stable results, and growth in AFFO per unit. Our portfolio of primarily net leased assets complemented by a growing industrial base, provides a solid foundation. Our long weighted average lease term and minimal debt maturities over the next few years insulate us from much of the current market-based risks that exists in today's environment.

As well, our privileged relationship with Canadian Tire provides a growth pipeline that is consistent and meaningful.

And our prospects beyond our core portfolio, including third party acquisitions, intensifications and surfacing value in underutilized assets, provide

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Canadian Tire Corporation - CT REIT Q2 2022 Earnings Results Conference Call Tuesday, August 9, 2022 - 9:00 AM ET

additional avenues for us to explore as we navigate through these uncertain times.

We are truly fortunate to find ourselves in a position to be able to continue delivering meaningful growth all while prudently managing risk. And as always, from this position of relative strength, we will continue to monitor the market for new opportunities.

With respect to what we accomplished in the quarter, I could not be prouder of the achievements of our team. We delivered several significant project completions, that Jodi will speak to shortly, and the diversity of these investments certainly highlights the internal capabilities and strengths that we have built at CT REIT over the last few years.

By adding nearly 600,000 square feet of GLA to the portfolio and increasing our weighted average lease term via the completion of certain strategic lease extensions, we continue to meaningfully grow and improve our asset base, as well as demonstrate how we work together with Canadian Tire to achieve our mutual objectives as it relates to our portfolio and their expanded store and supply chain network strategies.

I am very pleased to welcome Jodi Shpigel, our Senior Vice President Real Estate, to her first conference call with CT REIT this quarter. Jodi has been a great addition to our Senior Executive Team and has most definitely hit the ground running.

With that, I will turn the call over to Jodi to provide an overview of our investments, leasing and development activities. Jodi?

Jodi Shpigel, Senior Vice President, Real Estate

Thanks, Kevin, and good morning, everyone.

As highlighted in our press release yesterday, we were pleased to announce two new investments this quarter totaling $30 million, which, once completed, will add an incremental 149,000 square feet of GLA to the portfolio at a weighted average cap rate of 6.81 percent. These new projects include the vend-in of land and the development of a new Canadian Tire store in Lloydminster, Alberta, and the expansion of an existing Canadian Tire store in Stettler, Alberta.

As Kevin highlighted, we had a busy quarter with respect to our investment and development activity. In total, we completed 12 previously announced investments, totaling $111 million and added 590,000 square feet of GLA to the portfolio. These projects included the expansion of our Coteau du Lac distribution centre, the development of a new Canadian Tire store in Moose Jaw, Saskatchewan, the completion of Phase 2 of our Orillia, Ontario redevelopment, land acquisitions in Sherbrooke East, Québec, and in Invermere, British Columbia, and also the expansion of seven Canadian Tire stores.

At the end of the second quarter, CT REIT had 28 properties that were at various stages of development, with six projects currently expected to be completed by the end of this year. The projects in our development pipeline represent a total committed investment of approximately $366 million on completion, $90 million of which has already been spent and $150 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 approximately 1.2 million square feet to the portfolio, 99 percent of which has been pre-leased as at quarter end.

In the second quarter, we also completed lease extensions for three Canadian Tire stores and one Canadian Tire distribution centre. As a result, the weighted average lease term of our portfolio increased to 8.6 years, one of the longest in the sector.

In addition to the CTC lease extensions, we are also happy to announce that we have successfully released the 100,000 square foot unit at our 11 Dufferin industrial building in Calgary, Alberta. Based on the strength of our property and the Calgary industrial market, we were able to secure this new tenancy with a third party logistics provider very quickly, achieving a 25 percent increase over expiring rents, with minimal invested capital and new rent to begin prior to the end of this year.

With this most recent lease commitment, our portfolio remains 99.4 percent occupied in line with the last quarter.

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Canadian Tire Corporation - CT REIT Q2 2022 Earnings Results Conference Call Tuesday, August 9, 2022 - 9:00 AM ET

I will now turn it over to Lesley to review our financial results. Lesley?

Lesley Gibson, Chief Financial Officer

Thanks, Jodi. Good morning, everyone.

As Kevin highlighted, we are very pleased with the results delivered by the REIT this quarter.

Second quarter AFFO per unit on a diluted basis was $0.284, an increase of 2.5 percent compared to the Q2 of 2021, primarily due to the impact of NOI variances, partially offset by increased personnel costs, which included retirement expenses of our former CEO. It should be noted that this is the last quarter that we expect to incur these retirement related expenses. Excluding this one-time cost, AFFO per unit was $0.287, up 3.5 percent from the same period last year.

Diluted FFO per unit this quarter was $0.313, a slight increase compared to the $0.310 in Q2 of 2021 as the growth in FFO exceeded the increase in the weighted average units outstanding.

Net operating income was $104.1 million for the quarter, an increase of 3.7 percent or $3.7 million compared to Q2 2021. This NOI growth was comprised primarily of 2.4 percent growth on a same- store basis and 2.8 percent growth on a same- property basis.

Same-store NOI for the quarter grew by $2.4 million or 2.4 percent as a result of contractual rent escalations contributing nearly $1.6 million, including the 1.5 percent average annual rent escalations excluded in the Canadian Tire leases, with the balance of the growth primarily from the continued recovery of capital expenditures and interest earned on the unrecovered balance which contributed approximately $0.7 million in the quarter.

In the second quarter, adjusted G&A expenses as a percentage of property revenue were 3.1 percent, which was above the 2.5 percent in Q2 2021. As previously mentioned, the accelerated amortization of long-term compensation costs related to our recent CEO transition have run through the P&L and drove slightly higher G&A expenses through the end of Q2,

which amounted to $0.5 million in the current quarter. Excluding this transition cost, adjusted G&A as a percentage of property revenue would have been 2.7 percent, comparable to the 2.5 percent in Q2 of 2021.

With respect to our portfolio fair value, the REIT recorded a small adjustment of $6 million on our investment properties for the second quarter of 2022. Determining fair value this quarter was particularly challenging in the absence of comparable sale transactions. We continue to apply our same consistent methodology in looking at property valuations and seeking external support from the appraisal community, which informs our view of the market. This led to no change in our overall cap rates during the quarter of 6.05 percent, with the increase in fair value being driven by higher NOI within our portfolio of properties including those projects completed in the quarter.

It should be noted, however, that our retail and industrial average cap rates did increase each by a couple of basis points, respectively, this quarter, but due to the increased relative weighting of our industrial properties due to the transfers from Properties Under Development, which are a lower relative cap rate than our average cap rate, the overall average remained consistent with Q1. With the rise in interest rates that we've seen thus far in 2022 and the prospects for future central bank hikes for the balance of the year, we are anticipating the potential for upward pressure on cap rates in the coming quarters.

Distributions in the quarter were $0.212 per unit, 5.7 percent higher than in the second quarter of 2021 due to the increases in the rate of distribution, which became effective with the monthly distributions paid in July of 2021 and July 2022. This resulted in an AFFO payout ratio of 74.6 percent for the quarter, in line with the 74.5 percent for the same quarter last year.

Turning now to the balance sheet. Our debt metrics remains strong, with the interest coverage ratio at 3.7 times in Q2 2022, consistent with the 3.7 times reported in the second quarter of 2021.

CT REIT's indebtedness ratio has improved, and was

40.2 percent as at June 30, 2022, compared to 40.9 percent last quarter and 41.2 percent as at year-end.

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