Plaza Retail REIT (PLZ.UN), a key player in the retail property industry, reported its fourth-quarter earnings for 2023, showcasing a period of robust achievements amid sector challenges. The company has successfully completed significant development projects, enhanced its financial position through equity raising and asset dispositions, and secured a promising lease renewal rate.
With a focus on non-discretionary and value retailers, Plaza Retail REIT remains optimistic about its future prospects, underpinned by a solid financial strategy and a positive outlook on net operating income (NOI).
Key Takeaways
- Plaza Retail REIT completed 626,000 square feet of development projects.
- Raised CAD 40 million in equity and completed a CAD 47 million disposition program.
- Renewed 871,000 square feet of leases with record high leasing spreads.
- Debt to assets ratio reduced to 51%, with manageable upcoming debt obligations.
- Anticipates yields of 7% or higher on new developments, with cost stabilization.
- Reported strong same-asset NOI growth and no significant expected vacancies.
- CAD 9 million of unencumbered assets and CAD 3 million of unused construction financing facilities.
- A CAD 9.5 million write-down in Q4, totaling a fair value rate decrease to CAD 20 million for the year.
- Weighted average cap rate stands at 6.86%.
- Positive NOI outlook with strong demand and record renewal spreads, despite potential bankruptcy risks.
Company Outlook
- Plaza Retail REIT is positioned as a best-in-class developer and owner of retail properties.
- The company is optimistic about the future, expecting strong demand from key retail sectors.
- Anticipates cost stabilization and higher yields on new developments compared to pre-pandemic levels.
Bearish Highlights
- A write-down of CAD 9.5 million was recorded in the fourth quarter.
- Impairment of a note receivable of over a million dollars related to telecommunications projects.
- Potential risks include bankruptcies that could affect occupancy rates.
Bullish Highlights
- Successful lease renewals totaling 871,000 square feet at high leasing spreads.
- Positive same-asset NOI growth with no significant vacancies anticipated.
- Recent bids for projects have been more favorable, indicating cost improvements.
Misses
- The company faced a significant write-down in the fourth quarter, impacting the year's fair value rate.
Q&A Highlights
- Plaza Retail REIT addressed the financial measures including FFO, AFFO, NOI, and same-asset NOI.
- Confirmed CAD 9 million of unencumbered assets and CAD 3 million of unused construction financing facilities.
- The company discussed the weighted average cap rate adjustment to 6.86%.
- Reiterated the positive outlook for NOI and leasing activity, countering concerns about potential bankruptcy risks.
Plaza Retail REIT's fourth-quarter report reflects a company that is navigating the complexities of the retail property market with strategic finesse. By focusing on development projects and maintaining a strong leasing momentum, the REIT is poised to capitalize on the evolving retail landscape.
Despite some setbacks, such as asset write-downs, Plaza Retail REIT's leadership is steering the company towards a stable and profitable trajectory, as evidenced by their positive NOI outlook and proactive financial management.
Full transcript - Plaza Retail REIT (PLZ) Q4 2023:
Operator: Good morning. I would like to welcome everyone to the Plaza Retail REIT Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Kim Strange, Plaza's General Counsel and Secretary. Please go ahead, Ms. Strange.
Kimberly Strange: Thank you. Good morning, everyone, and thank you for joining us on our Q4 2023 results conference call. Before we begin today, we are obliged to advise you that, in talking about our financial and operating performance and in responding to questions today, we may make forward-looking statements, including statements concerning Plaza's objectives and strategies to achieve them as well as statements with respect to our plans, estimates and intentions or concerning anticipated future events, results, circumstances, or performance, which are not historical facts. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the risks that could impact our actual results and the expectations and assumptions we applied in making these forward-looking statements can be found in Plaza's most recent annual information form for the year ended December 31st, 2022, and Management's Discussion and Analysis for the fourth quarter and year ended December 31st, 2023, which are available on our website at www.plaza.ca and on SEDAR+ at www.sedarplus.ca. We will also refer to non-GAAP financial measures this morning, widely used in the Canadian real estate industry, including FFO, AFFO, NOI and same-asset NOI. Plaza believes these financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the trust. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similar titled measures reported by other real estate investment trusts or entities. They should be considered as supplemental in nature and not as a substitute for related financial information prepared in accordance with IFRS. For definitions of these financial measures and where to find reconciliations thereof, please refer to part 7 of our MD&A for the nine months ended December 31st, 2023, under the heading explanation of non-GAAP measures. I will now turn the call over to Michael Zakuta, Plaza's President and CEO. Michael?
Michael Zakuta: Thank you, Kim. Good morning. In 2023, retail property developers and owners faced strong headwinds, as we dealt with the impact of geopolitical crises, inflationary pressures, and rapid interest rate expansion. Despite all of this, Plaza experienced many achievements, and we have once again showcased our resilience by developing and maintaining a high quality portfolio of essential needs retailers who target non-discretionary spending. During the year, we completed 626,000 square feet of development projects and significantly advanced a number of other developments through pre-leasing and pre-construction phases. We raised CAD 40 million of equity at the end of March, our first equity issue since 2016, which allowed us to delever and strengthen our balance sheet. We successfully completed a CAD 47 million disposition program at prices in excess of our IFRS values. The net effect of our capital recycling program was that we have increased the average size of our properties, reduced the average age of our assets, and improved the overall quality of the portfolio. We renewed 871,000 square feet at record high leasing spreads. We were very active repositioning existing space and creating new space in our existing properties. Repositioning tenants typically comes with some short term pain due to the fact that we sometimes must move tenants out and temporarily lose revenues. Additionally, leasing costs are incurred, and we only begin to benefit from enhanced overall property NOI upon the reopening of the space. At the beginning of the year, we added depth to our management team, with the addition of Jason Parravano as COO. With the addition of Jason, we have the strongest management team in Plaza's history, with all of the key players in the age bracket that will ensure long term success for our business. With market sentiment starting to favor retail, with our development pipeline and the strength of our management, we are very optimistic about our future. I will now turn the call over to Jason, who will talk about our future prospects.
Jason Parravano: Thank you, Michael. First and foremost, I'm incredibly excited to join a company with a long history of success, a track record for growth and a reputation that goes unmatched. From the warm welcomes I've received to the passion for the business I've witnessed so far, I have to say I'm excited for the future of Plaza. Tenant demand is robust and the geographic positioning of our asset mix is definitely an advantage. The markets in which we operate have significant population growth, and incremental demand from consumers translates to better performance for our tenants in markets where retail supply is limited. This has a direct impact on rental rates. And one thing we can all agree on is that where we see some strong demographic trends, whether through job growth or population growth, this benefits retailers overall. We continue to experience the great contrast between non-discretionary retail versus discretionary retail. This is primarily due to a downturn in the economy due to ongoing inflation. We hope these challenges will soon be behind us, but until then the non-discretionary retailer continues to march forward. This would include any essential needs retailers, such as groceries, pharmacies, pet food stores, dollar stores. These non-discretionary retailers are aggressive in seeking new opportunities, whether opening net new locations or expanding into bigger spaces when available. We're also experiencing an important contrast between discount or value retailers versus retailers with traditional pricing models. We are seeing a lot of demand from QSRs who offer consumer a good value proposition in contrast to any mid-priced sit down restaurant offering. We recently participated in the Whistler ICSC, where we met with approximately 15 national retailers, all who expressed the need to expand and open new locations. Our relationships with these retailers have always and will always be key to our success and will help build our development pipeline. Our reputation in the industry for delivering successful retail projects within an increasingly complex and costly regulatory environment, coupled with fewer pure play retail developers operating in our geographies, has resulted in significant barriers to entry for new players. Plaza's focus has always been retail. We know it very well. With most retail REITs having pivoted into other sectors, especially residential and industrial, we remain focused on being a best-in-class developer and owner of retail properties. We are the only publicly traded REIT offering investors access to pure play essential needs, value and convenience retail developments. Our capital recycling program, as Michael mentioned, resulted in the sale of CAD 47 million of properties in 2023. We are hard at work deploying net proceeds through numerous developments and tenant repositionings. I do not expect our 2024 program to be as robust. However, we are currently in the process of listing a handful of properties, and we are seeing some good demand from purchasers. I will now turn the call over to Jim Drake, our CFO.
Jim Drake: Thank you, Jason. Good morning, everyone. A few of the accomplishments Michael and Jason mentioned, although having a positive impact and setting us up for long growth and resilience, do have a short term impact. Our non-core asset sales, for example, are very positive for the business as they assisted with repaying our CAD 47 million debentures earlier in the year and contributed to strengthening our balance sheet and portfolio quality. [Technical Difficulty] NOI, though. Total NOI for the quarter and year were slightly below last year, with increases from [Technical Difficulty] NOI and development completions, offset with operating expense inflation [Technical Difficulty]. Same-asset NOI, however, was up 0.4% for the quarter and 1.1% for the year as a result of new leasing, rent escalations on existing leases, and our strong lease renewal spreads. On a dollar basis, annual FFO was up 8.3% over last year, with per unit performance impacted by our equity raise and issue of 8.5 million units earlier in 2023. AFFO was impacted by the repositionings Michael mentioned, which improved our portfolio and tenant quality, can be capital intensive. Excluding the few significant repositionings completed during the year, annual AFFO on a dollar basis would have been up 2% over last year. Under our development program, the completions Michael dimensioned represent six projects and we transferred CAD 44 million net to income producing properties. These projects [Technical Difficulty] tenants which focused on essential needs and non-discretionary spending. We also made significant progress on a number of other projects and anticipate additional completions over the next few quarters. These will all contribute to earnings growth going forward. On the leasing front, overall [Technical Difficulty] was 20 bps from last quarter. Now it's 97%, which is still at the high end of our recent history. We are continuing to see improvement in our lease renewal spreads at 7.7% overall or 8.2% excluding the automatic renewal of an anchor tenant at the same terms. This represents our strongest performance in recent history. On the balance sheet, our debt to assets ratio is down significantly since last year at 51% excluding land leases. We have a very manageable CAD 37 million of mortgages rolling in 2024 with a weighted average rate of 4.43% and an overall loan to value of 47%. We will renew these mortgages and, in certain cases, upward refinance to 60% to [Technical Difficulty] loan to value. In December and into January of 2024, we issued a CAD 5 million unsecured debenture with a 6.75% coupon, approximately CAD 600,000 of which was for a six month term, with the remainder for one year. The proceeds were used to repay some maturing mortgage bonds and pay down our operating line. We have an additional CAD 6 million of unsecured debentures and CAD 3 million of mortgage bonds, maturing in 2024 which we intend to renew. The market for debt [Technical Difficulty] pretty healthy. And we continue to see strong interest in our secured and small unsecured offerings. Although interest rates remain a bit volatile, we do anticipate they will trend down over 2024. We are seeing interest rates for fixed rate mortgages in the 5.4% to 5.7% range. Liquidity at year-end totaled CAD 51 million, including cash [Technical Difficulty] and unused development and construction facilities. We also had CAD 9 million of unencumbered assets at year-end and CAD 3 million of unused construction financing facilities at non-consolidated properties. Finally on valuation, we took a CAD 9.5 million write-down in Q4 generally due to cap rate movement, bringing the fair value rate down to CAD 20 million for the year. Our weighted average cap rate is now 6.86%. Those are the key points relating to the quarter and year. We will now open the lines for any questions. Operator?
Operator: [Operator Instructions]. Your first questions come from Pammi Bir from RBC.
Pammi Bir: Just with respect to the project pipeline, what are you seeing in terms of costs. Have they now started to stabilize? And then as well, just your outlook for the returns and I think the CAD 130 million plus that you've got [indiscernible].
Michael Zakuta: We're definitely seeing a serious improvement in in costs. We believe that we've turned the corner. And any recent bids that we have look a lot better than what would have bid a year or two ago, so that we're clearly very positive about costs. And in terms of yields, we're obviously working towards a higher yield than we would have pre-pandemic, very much based on the cost of debt and being able to have some strong positive leverage on our deals. I don't know if Jim or Jason, anything to add?
Jim Drake: Maybe I'll just quickly add, Michael. On an unlevered basis, in the past, we've always stated we were looking for 7% or higher. We'll still see that on the new developments that we have underway.
Pammi Bir: So, still north of 7%. I believe there was an impairment of a note receivable just over a million bucks. Can you just expand on what that related to?
Jim Drake: We've had some of those notes receivable outstanding for a few years now. And they relate to telecommunications where we redeveloped properties and Plaza invested the costs on behalf of the LP. So we'll collect those in due course. We just thought it would be prudent at this point to set up that receivable.
Pammi Bir: Sorry, are these just a variety of projects? Or is it one in particular?
Jim Drake: No, it's across a few projects.
Pammi Bir: Just in terms of the NOI outlook, demand is pretty strong. Your renewal spreads, as you mentioned, are at record levels. Does this set you up, do you think, in 2024 to put up something stronger from a same property NOI standpoint, I think this year tracking around, call it, 1%. Secondly, any weak spots that you're anticipating from an occupancy standpoint or any sort of tenant segments?
Jason Parravano: It's Jason here. With respect to our same-asset NOI, we continue to see that similar level of growth from our renewal spreads. With respect to vacancies, there's nothing really in the foreseeable future that we're tracking at the moment. Obviously, with the economy where it is, bankruptcies could happen, and tomorrow morning we can be the victim of a tenant going bankrupt. We've seen retail bankruptcies at the later part of 2023. It's been relatively quiet earlier this year. But I think we have a plan in place to reposition assets that could be affected by retailers going underwater.
Operator: [Operator Instructions]. Mr. Zakuta, there are no further questions at this time.
Michael Zakuta: We wish to thank all the participants for joining us today. Thank you.
Operator: Ladies and gentlemen, this concludes the conference call for today. Thank you for joining. Please disconnect your lines.
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