Cominar Real Estate Investment's (CMLEF) CEO Michel Dallaire on Q2 2016 Results - Earnings Call Transcript

| About: Cominar Real (CMLEF)

Cominar Real Estate Investment Trust (OTC:CMLEF) Q2 2016 Earnings Conference Call August 4, 2016 11:00 AM ET

Executives

Michel Dallaire - Chairman and Chief Executive Officer

Sylvain Cossette - Executive Vice President and Chief Operating Officer

Gilles Hamel - Executive Vice President and Chief Financial Officer

Guy Charron - Executive Vice President, Operations Retail Sector

Jean Laramee - Executive Vice President, Development

Analysts

Heather Kirk - BMO Capital Markets

Brad Sturges - Industrial Alliance Securities

Michael Smith - RBC Capital Markets

Matt Kornack - National Bank Financial

Pammi Bir - Scotia Capital

Jenny Ma - Canaccord Genuity

Operator

Good morning, ladies and gentlemen, and welcome to the Cominar second quarter results conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press zero for the operator. This call is being recorded on Thursday, August 4th, 2016.

And I would now like to turn the conference over to Michel Dallaire. Please go ahead.

Michel Dallaire

Thank you. Good morning, and welcome to today's conference call, where we will be discussing Cominar's financial results and highlights for the second quarter of 2016.

The presentation for this call has been posted in both English and French in the Conference Call section of our website. In line with our disclosure principles, access to this call is open to the financial analysts, investors, the general public, and the media. However, the question period will only be open to financial analysts and investors.

Before we begin, I would like to draw everyone's attention to the material concerning forward-looking statements on page 2 of the presentation. With me today to discuss our financial results and highlights are Sylvain Cossette and Gilles Hamel. Guy Charron, Michael Racine, and Jean Laramee are also with us.

For Q2, upfront, I wish to highlight that we maintained our aggressive leasing policy, which has enabled us to sign new leases aggregating 2.3 million square feet since the beginning of the year, which exceeds the total of new leases signed during 2015. This excellent performance contributed to increase our occupancy rate to 92.6% as of quarter end, up 0.7% from December 31st, 2015. Sylvain will provide more color on our leasing activities later on.

Secondly, I wish to highlight the continuing execution of our capital optimization strategy, as you can see on page four. In Q2, we completed the sale of five retail properties for CAD39.5 million at a cap rate of 7%. As you can also see from the table on page 4, we initiated our capital optimization program in the second half of 2015, and to date, we have successfully completed property sales, aggregating nearly CAD210 million, including approximately CAD110 million of sales in 2016. We are presently also working on approximately CAD150 million of asset sales. Net proceeds will be used to pay down debt and delever. In this regard, we are maintaining our long-term debt ratio target at 50%, and we are aiming to be around 53% at year-end.

Sylvain will now review our leasing and development activities.

Sylvain Cossette

Thank you, Michel. On page five, as mentioned by Michel, you will note that at quarter end, our overall occupancy rate increased to 92.6%, up 0.7% from year-end 2015. Since the beginning of the year, our occupancy rate has increased by a healthy 1.9% in the retail segment, 0.5% in the office segment, while remaining stable, above 94%, in the industrial segment. In the retail segment, our releasing success in respect of the space vacated by Target has contributed to this increase. I will come back to Target later.

In the first six months, we renewed 45.7% of leases maturing in 2016, and we have also signed new leases for a total leasable area of 2.3 million square feet in the first half of 2016, well in excess of 1.7 million square feet for all of 2015. By the end of Q2, through renewals and new leases, we covered 80% of our 2016 expiries.

Similar to Q1, we are continuing to achieve strong step ups on lease renewals in the Quebec City industrial and office segments, at 6% in both cases. This quarter, as anticipated, we also experienced strong step ups in our Montreal industrial segment, above 4%.

Moving on to pages 6 and 7, the strong demand in the Quebec City market and the Montreal industrial segment are also illustrated in our development pipeline. In the Quebec City market, our development project at 155 Fortin Street, a 47,500 square foot industrial property, is now 100% leased, with delivery anticipated in Q3 of this year.

We are also making progress at Espace Bouvier, an office and retail joint venture development in Quebec City, where a standalone 20,000 square foot building was delivered in the quarter to Avril, a specialty health grocer, and after quarter end we leased a standalone 9,000 square foot building to the St-Hubert restaurant group to be built for delivery in Q4 of this year, and we continue to make progress with the 83,000 square foot office component with 41% leased up and 21% under meaningful discussion.

In the Montreal industrial segment, we are building a fully leased 130,000 square foot industrial building in Laval. Construction is well underway and delivery is scheduled for Q4 of 2016.

Our 118,000 square foot office development at 3055 Saint-Martin in Laval is 60% leased, and we are in discussion for a significant part of the remaining space.

On page 8, I would like to provide a quick update on our efforts with respect to the five former Target leases, which were disclaimed as part of the Target auction process. At Centre Laval in Q2, 2016, we signed a lease with Sportium, which is part of the SAIL Plein Air Group, for 46,000 square feet, opening in Q3 of 2017. And we are currently in meaningful discussions with a prospective tenant for 30,000 square feet for opening in Q2 of 2018, and in preliminary discussions for a significant part of the remaining space.

At Centre Les Rivieres in Trois Rivieres, in addition to the previously announced 56,000 square foot store leased to Rona, we are in meaningful discussions with prospective tenants for essentially the remainder of the space.

At Place Longueuil discussions are ongoing with a prospective tenant for the total area of 79,000 square feet of the former Target space. This would be for an early 2018 store opening.

I will now ask Gilles to discuss our financial results in further detail. Gilles?

Gilles Hamel

Thank you, Sylvain, and good morning everyone. On page 9, due mainly to the disposition of income-producing properties completed in 2015 and 2016, and compared to the first funding quarter of 2015, operating revenue decreased by 3.1%. Net operating income decreased by 5.4%, recurring FFO decreased by 7%, and recurring AFFO decreased by 6%.

Moving on to page 10, our same property portfolio NOI decreased by 2%, as we were impacted by various matters with it, the bankruptcies of Target and Co-Op Atlantic, and our aggressive leasing strategy.

Broken down by market segment, office same property NOI decreased by 2.4%, retail by 0.8%, and industrial by 3.5%. We are reiterating our 2016 same property portfolio NOI guidance of approximately minus 0.5%.

On page 12, you will find a summary of our financing activities for the second quarter of 2016, which was highlighted by the issuance of CAD225 million series 10 senior unsecured debentures, bearing interest at a rate of 4.247% and maturing in May 2023. This issuance was completed to secure in advance the repayment of the series 6 floating rate on secured debentures, maturing in September of 2016.

On page 13, our debt ratio remained stable at 54.4%. As previously mentioned, while we are maintaining our long-term debt ratio target at 50%, we are aiming to be around 53% by yearend. As at June 30th, our weighted average interest rate on total debt stood at a healthy 4.12%, and our annualized interest coverage ratio remained stable at 2.67 to 1. As at June 30th, our unencumbered asset pool stood at CAD3.7 billion, representing a 1.51 times senior unsecured indebtedness outstanding well above our 1.30 times covenant level.

Moving on to page 14, you will find details of our financial position. At quarter end, total assets stood at CAD8.3 billion. Senior unsecured debentures stood at CAD2.2 billion. And mortgages payable stood at CAD2 billion. Our bank borrowings were CAD246.5 million providing liquidity of CAD453.5 million. In the quarter, we also extended the term of our unsecured credit facility for an additional year to August 2019.

This completes our financial review for the second quarter of 2016. I will now turn the mic back to Michel.

Michel Dallaire

Thank you, Gilles. Before concluding, we would like to reinforce that our main objective in 2016 is to increase our occupancy rate as this is where the fundamental of our businesses lie. We are satisfied with the progress we have made towards the former Target space, and we are confident that in the end the positive financial impact will outweigh the negative one.

Thank you for participating in this call. I will now turn the mic to the operator for the question period.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question is from Heather Kirk from BMO Capital Markets. Please go ahead.

Heather Kirk

Just in terms of the occupancy, it seems like it's been a little tougher to move it up. What do you sort of see it taking to get a little more momentum there? Is it capital? Is it people? You know, different approach with brokers? I'm just trying to get a sense of what the missing link is.

Sylvain Cossette

Okay. First of all I think we're looking at demand, Heather. We continue to have experienced strong demand in the industrial segments, especially in Quebec City and Montreal. In the office, we still have demand, very strong demand in Quebec City, and we have stable demand in Montreal. Our step ups are very, very strong and healthy in the Quebec City office market, and in Montreal we're progressing.

What we've been doing in terms of trying to increase and maintain a more aggressive leasing policy, going beyond more broker interaction, is we've been investing or refurbishing a lot of our buildings and modernizing them, common areas, facilities, adding amenities, bringing them more to that. And in instances where we've done that, that's paid off, so that's a healthy sign.

The other thing which is interesting to note is, if you look at what happened in Ottawa, if you go back to Q3 of 2015, we had our high point of negative step ups. And since that Q3 2015 period, we've been trending in the right direction with step ups, and that's a sign for us of demand coming back, and a balance coming back. The public work leases are behind us in Ottawa and we see them come back to more normal market dimensions or economics. And in the Ottawa market, we currently have in excess of 400,000 square feet of office space under demand, so we're seeing good trends there.

So I think the answer to your question is just for us staying the course, is continue to do what we've been doing for the last quarters and trying to creep up our occupancy rate over time.

Heather Kirk

And just to dig in a little bit more on the industrial, you had a falloff in the occupancy level and in the same property NOI. Was there something particular this quarter that drove that? Because it's been an area that's been relatively stronger.

Sylvain Cossette

What we had in the industrial part of Montreal is we had a couple of departures of 100,000 and more square feet, and we very rapidly backfilled that space, so it's just a timing issue. But how quickly we backfill sizeable space is an illustration to us of the strong demand in the industrial segment.

Heather Kirk

And in terms of the same property NOI -

Sylvain Cossette

Heather, and we also had, in the Quebec market, we had the effect of the prior quarter bankruptcy in our Quebec industrial portfolio, which we backfilled that space. But that also impacted upon the NOI performance.

Heather Kirk

Okay. And in terms of the same property NOI, if I understand correctly you calculated it on an accounting basis. Was there anything in there in terms of the non-cash items that would have made the number more negative this quarter?

Gilles Hamel

Non-cash item, no there is no - nothing significant in terms of non-cash item affecting the NOI.

Heather Kirk

Okay. And just a final question. Can you comment on Brookfield's lease with Scotia in Calgary and how your property might be affected, and what the timing of that will be?

Sylvain Cossette

Yes, Heather. Well first of all, Scotia has announced that they're going to the Brookfield building. Scotiabank is under lease with us to December 31 of 2017, and we have that window of time to release the space. We have already commenced the process of discussions with potential brokers and a rebranding of the building to give it a new name. We're looking at two scenarios, either a tenant who would take down the nearly entirety of the space because we're in a very unique situation where we have extremely good location, and with the possibility of giving very significant visibility and branding and signing rights for the building, which has very good visibility.

When you look at it, for example on Hockey Night in Canada, the building sticks out. So we're looking at that type of configuration, and we're also looking at breaking up the space. The floorplan of that building is very permissive in terms of breaking up the space into three or four quadrants, so we're looking at different permutations. And Calgary, as you all know, the market right now in Calgary is very tough, but things can move quickly in that market.

Heather Kirk

So what kind of rents would they have been paying and what is the total square footage that they occupy at the property, if we were to theoretically be - .

Sylvain Cossette

So I'll let Gilles give you more financial data, but in terms of square footage, Scotia was occupying roughly, office and the retail concourse together, we were occupying 124,000 square feet. The retail component was around 35,000 square feet to 40,000 square feet. And we feel very strongly about the quality of that retail portion, so we've already been approached by people who want to lease that retail part, so we'd be looking at the 80,000 square feet of the office.

And when you look at - you know going back to Scotia, since day one we've acquired it, that is, luckily for us, but that's not been a property we've been passive. We've invested over CAD26 million in that property in modernizing it and bringing it forward. So we're not playing catch up with the building. We've done a lot of things to improve the building. And we think in terms of the class A buildings, we can bring that building to the top of anyone's list through the investments we've made and its location. So I'm not saying it will be easy, but we have to work our way through this one.

Heather Kirk

Hello?

Michel Dallaire

Hello.

Heather Kirk

Sorry, it seems like it cut off there. I was just wondering if you had the rent number.

Sylvain Cossette

You mean what they were paying for a square foot?

Heather Kirk

Yes, what the rent that's coming off would be.

Sylvain Cossette

They were paying around CAD22 a square foot. CAD24, it depends where and which floor, but blended was CAD24.

Heather Kirk

Okay.

Sylvain Cossette

Blended was CAD24 blended. But you've got to be careful, that's blended with retail, right.

Heather Kirk

Right, right.

Sylvain Cossette

So if you bring it down, the office component will be in the low CAD20s.

Heather Kirk

Okay. Thanks very much, guys.

Sylvain Cossette

Be careful, that CAD24 is a blended number.

Gilles Hamel

Yes, it is.

Operator

Thank you. Your next question is from Brad Sturges from Industrial Alliance Securities. Please go ahead.

Brad Sturges

Hi, good morning. Just quickly on getting an update on planned dispositions for the rest of the year. You've given a target of CAD150 million. Just want to get a sense of where you are in that process and a sense of maybe timing to complete those transactions.

Michel Dallaire

Well, we are presently in a process where we are building the documentation. We already hire a broker, so we are preparing the documentation and we intend to go out with those three portfolios over the next something like couple of weeks. And we intend to close those sales by something like the six or nine month, somewhere between six and nine month from now, so.

Brad Sturges

Okay. And in terms of both the retail and the industrial assets, that's going to be mainly Quebec focused assets?

Michel Dallaire

It's mainly - about half of those are in the Province of Quebec. And the other one are outside of the province.

Brad Sturges

In terms of NOI contribution or a cap rate, would some of those assets be vacant? So just trying to get a sense of what that - I guess what the NOI contribution would be for the planned sales.

Michel Dallaire

Well, do you have the number? I don't have it with me, sorry.

Brad Sturges

Okay. All right, I'll turn it back. Thanks a lot.

Operator

Thank you. Your next question is from Michael Smith from RBC Capital Markets. Please go ahead.

Michael Smith

Thank you, and good morning. I just wondered, like just continuing on the properties held for sale, I notice it's down CAD50 million from last quarter. I think you had CAD200 million for sale now it's CAD150 million. I'm wondering if you could just give us a little bit of color on what happened there or what your thoughts are.

Gilles Hamel

Well, Michael, the difference is what we're seeing today, we are actually working actively on CAD150 million, three portfolio totaling CAD150 million held for sale. And the prior quarter we were saying that in our program we are aiming at CAD200 million, but actually what we are working on represent CAD150 million of properties held for sale.

Michael Smith

And then I guess should you be successful in selling that CAD150 million, you'll reevaluate whether the other CAD50 million would be sold or not?

Michel Dallaire

Yes. Yes, you're right, Michael. And we have to move on so we just identified those three portfolio and we move on with those portfolio and we will see what's going to happen after. So it's an ongoing process.

Michael Smith

Okay. And just switching gears. So you're seeing property NOI guidance you're maintaining for a full year of 0.5.

Gilles Hamel

Minus 0.5.

Michael Smith

Sorry, minus 0.5, right. And the bulk of - I mean you were negative the first two quarters, you know 2% this quarter. Is the turnaround going to happen mostly in Q4 or is it going to be balanced between Q3 and Q4?

Michel Dallaire

Q3 and Q4.

Michael Smith

So more of a balance, okay.

Michel Dallaire

Yes.

Gilles Hamel

And Michael, if I may add, keep in mind that minus 2.7 for Q1 and minus 2 for Q2, we are exactly on our budgeted figures.

Michael Smith

Okay.

Gilles Hamel

And our budgeted figures continue to be, for the rest of the year, a guidance of minus 0.5 for 2016.

Michael Smith

Okay.

Gilles Hamel

Because we're right on our budget actually.

Michael Smith

Okay. Good. And what is your occupancy outlook for yearend with your aggressive leasing program?

Michel Dallaire

You know, Michael, we never give any guidance like this in the past, so I'm sorry but I don't think we will give any guidance on the occupancies.

Michael Smith

Okay. Fair enough. And just finally, when I look at your MD&A, and look at your top tenants, I see Scotiabank there at number four, 1.1% of operating revenues. Is it fair to say that most of that is from Scotia Place in Calgary?

Gilles Hamel

One half.

Michael Smith

One half? Okay. One half. All right. Thank you.

Operator

Thank you. Your next question is from Matt Kornack from National Bank Financial. Please go ahead.

Matt Kornack

Hi, guys. I was wondering if you can just quickly touch on how the retail market in Quebec is developing and what you're seeing in assets there. I know bad debts have been a concern and you said it was turning around. Is that continuing to be the case?

Michel Dallaire

Guy, would you?

Guy Charron

Guy Charron speaking. Matt, obviously, as you know, the demand is there, 529,000 square feet of new lease signed in the first six months of the year 2016 is the double of the last year we signed 264,000 in 12 months. So you see there is demand. Obviously, you know the Target situation is - I think we accomplished good progress at that level. Obviously, you know there is certain tenants, clients right now that are looking for expansion, like the sports sector , HMM, T.J. Maxx, Winners, Marshall's, ACQ, Dollarama, grocers, restaurant. So obviously there is demand right now in the market. Obviously it's still very volatile. There is still some challenge, but it's going in the right direction right now. And the fact that it's our bad expense, it's very good compared with what it was last year.

Matt Kornack

And with regards to tenancies, has the acquisition of the Ivanhoe portfolio how did it in terms of the relationships that you have with tenants and your ability to locate them in existing properties as well as the ones your acquired?

Michel Dallaire

It's certainly a plus for us. Obviously it had some volumes, and it had some brand names at the table, so it's a very positive move I think that we made last year or two years ago.

Matt Kornack

And then one last question. With regards to Laval, I think the city has put out sort of a comprehensive new plan with regards to density and several of your sites are sitting in sort of higher density areas where they'd like to build the downtown. How do you see that unfolding over a period of time, and is it near term or how should we look at the development upside with that respect?

Jean Laramee

Jean Laramee speaking here. Yes, I think the city is changing their master plan and this is good news for some of our assets which are located near the metro station. But the outlook I would say timing wise is more a medium term thing, just a question of lease expiries and process and all this. But there's definitely potential down there.

Matt Kornack

Okay. And for both I guess residential densification, I mean potentially office as well or would it focus more on residential?

Jean Laramee

No, well it would be mixed use. I guess for that the program, you know based on market and demand and all this, but I would say all asset classes would be possible. That remains to be seen what we'll do ourselves or not, so.

Matt Kornack

Okay. And one last question for Gilles. The straight line rent in this quarter was quite low, it was only about CAD429,000 I think. Is that a good run rate or should we assume it goes back to more of a normalized million dollars.

Gilles Hamel

You're right, Matt. The straight line revenue this quarter was lower than our expectation. There's reason for that, and it's not a good run rate going forward. I think you could keep as a run rate CAD1.2 million a quarter.

Matt Kornack

Okay. Perfect. Thanks, guys.

Operator

Thank you. Your next question is from Pammi Bir from Scotia Capital. Please go ahead.

Pammi Bir

Just going back to your same property NOI guidance again, I'm just trying to reconcile the path to get there. So maybe just two questions. First, can you give us a sense of the difference between your in place and committed occupancy? And then secondly, what are your thoughts by segment to get to that call it flat or negative 0.5% for the year?

Gilles Hamel

In terms of the difference between our committed occupancy and [indiscernible] occupancy we don't have this figure in front of us actually. Regarding how to reconcile our guidance of minus 0.5% on the same property and our NOI growth, as mentioned before, next two quarters are expected to be or projected to be, and again we are actually right on our budget, so the next two quarters will be positive. Will be positive in each and every segment. I mean there will be an announcement in each and every segment. And by the end of the year we - some of the segments would have been positive and others slightly negative.

Pammi Bir

I take it would retail and industrial sort of lead with the releasing of Target, and then office maybe at the back, or trailing the other two groups?

Gilles Hamel

Office will be at the back, yes. Retail and industrial will be the main contributor.

Pammi Bir

Okay. That's all I have. Thanks.

Operator

Your next question is from Jenny Ma from Canaccord Genuity. Please go ahead.

Jenny Ma

Thanks, good morning. Just one quick question. So just to confirm, it seems like the bulk of the property dispositions will occur in six to nine months you said. Is that correct?

Michel Dallaire

Yes.

Jenny Ma

So I just wanted to reconcile that with your leverage target of 53% by yearend. Could you talk a little bit about how you expect to get there in the next few months?

Michel Dallaire

Well first we use the - we intend to use the sale of those assets to reduce our debt ratio. And we expect to close by yearend but unfortunately as we have to run a process that's why we give us another three months just in case. But the target is to close those transactions by yearend.

Jenny Ma

Okay. So it's possible that you'll reach the 53% target maybe a little bit few months past yearend?

Michel Dallaire

Yes. If it's not at yearend, it's going to be close to it. That's why we are saying it's six to nine months. But six months is going to bring us to yearend, and we're still targeting to close those transactions by yearend, but as we have to run a process, and it's exactly where we were last year, and we close some transaction after yearend. But we expect to close before yearend.

Jenny Ma

Okay. So it's really just a matter of timing?

Michel Dallaire

Yes, definitely.

Jenny Ma

Okay, great. Thank you.

Operator

Thank you. [Operator instructions] There appears to be no further questions at this time. You may proceed.

So, thank you once again for taking part of this conference call, and we invite you to join us again in November 2016 for our third quarter end results. Please have a nice day.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.

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