Morguard Real Estate Investment Trust (OTC:MGRUF) Q4 2019 Earnings Conference Call February 14, 2020 4:00 PM ET
Andrew Tamlin - CFO
John Ginis - Director, Asset Management, Retail
Conference Call Participants
Himanshu Gupta - Scotiabank
Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust Fourth Quarter Results Conference call. [Operator Instructions]. Also note that this call is being recorded on Friday, February 14, 2020.
At this time, I would like to turn the conference over to Mr. Andrew Tamlin. Please go ahead, sir.
Thank you, and good afternoon. Just as a point of introduction, my name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tullio Capulli, VP of Eastern Asset Management; along with Rai Sahi, Chief Executive Officer and Chairman of the Board.
Thank you all for taking the time to join the call. Before we get into the call, I would like to point out that our comments will mostly refer to the 2019 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we would make on this call.
Morguard REIT is a diversified commercial REIT and has a diversified portfolio of 48 retail, office and industrial properties, consisting of approximately 8.5 million square feet of gross leasable area in 6 provinces. The trust asset management team is focused on continually improving the returns from the assets currently owned and making quality investments that are accretive in the long term.
The fourth quarter of 2019 was a relatively quiet quarter with results fairly in line with expectations. Occupancy results -- occupancy rates remained relatively unchanged year-over-year, 93.5% at the end of 2019 as compared to 93.8% at the end of 2018.
Net operating income for the year decreased 1.4% year-over-year to $149.961 million from $152.078 million in 2018 due to lower same asset net operating income in our enclosed mall assets, specifically, assets which lost their Sears tenancy in 2017 and the disposition of an industrial asset partway through the year.
Earlier this year, the trust commenced redevelopment of the former Sears premises at Pine Centre Mall in Prince George, British Columbia. The new wing will consist of approximately 76,000 square feet of redeveloped GLA and will be anchored by Winners/HomeSense slated to open in the spring of 2020. The finalization of some of the remnant space is expected to take until early 2021. This project will also feature an additional retailer complemented by small bay CRU situated along the common area mall corridor. Approximately 65% of the space under redevelopment is committed, and the total cost of this project will be approximately $17 million.
Management is also working on a plan for the St. Laurent mall in Ottawa, which we expect to share shortly. Adjusting for these two assets, the same asset net operating income for the enclosed regional mall portfolio would be flat.
Interest expenses increased 4.2% for the year due to a small increase in borrowings and a change in 2019 relating to how lease liabilities get accounted for. Lower capitalized interest from best development projects also contributed to this. Interest expense for the fourth quarter was approximately flat to 2018.
Both basic FFO and AFFO per unit for the year have decreased slightly compared to 2018. The debt-to-asset ratio remains relatively unchanged at 45.8% as compared to 45.1% from a year ago.
The trust continues to be active from a redevelopment standpoint, recycling our capital into development projects in our existing portfolios that are -- existing properties that are accretive. Since January 1, 2019, the trust has delivered 93,000 square feet of new or remerchandised area. Included in this area is 6,800 square feet of new leasable area at Pine Centre in Prince George, British Columbia. This is currently 100% leased and is based around a restaurant, Browns Socialhouse. Another 43,600 square feet of remerchandised former Safeway space at Parkland Mall in Red Deer, Alberta, was brought on stream in the second quarter. This space is 60% leased and is focused around the new winners. Lastly, in the fourth quarter, the construction of a new freestanding pad space at the center in Saskatoon was completed, adding 29,500 of square feet to this asset.
The trust is also working on a major redevelopment of the Centre Mall with modernization of both the interior and exterior of the mall within the food court. This is going well and is expected to be completed late in 2020.
The trust revalues its properties every quarter in accordance with IFRS. Fair value adjustments for the fourth quarter of 2019 was a loss of $28.6 million. This was primarily due to adjustments in the trust retail portfolio.
During 2019, there were $34 million spent on development capital, down from $50 million in 2018, primarily due to less development projects on the books. The trust continues to use a sustainable reserve for maintenance capital and leasing. This amounts to $25 million for the year or $6.250 million for the quarter. This is based on a review of the 3-year forecast of leasing and maintenance capital needs. Actual expenditures were $22.8 million for the year.
Lastly, the trust closed on the sale of a small, nonstrategic, single-tenant industrial property near Montreal during the third quarter. Proceeds on that were $15.9 million.
Wrapping up, we continue to be positive about our business and the objective of building value for our unitholders. Our strong pipeline of redevelopments in recent years have been very well received, and we're looking at similar projects in the future.
We look forward to continuing to execute our strategy, and thank you for your continued support.
[Operator Instructions]. And your first question will be from Himanshu Gupta at Scotiabank.
In terms of lease expiry in 2020, I think around 800,000 square feet of retail space is coming up for renewal. So how much of this is enclosed regional malls and what kind of tenant retention are you expecting?
So this is John Ginis responding. I don't have the split between community strip and enclosed mall or breakout of GLA expiring of the 800,000 renewal. But I would say that historical retention of our portfolio has been 3 quarters. We see no reason why that would deviate for 2020.
Okay. So you're expecting around 75% of tenant retention. And then in terms of the rental spreads, I think as per the disclosure, expiring, in a plain sense, are like $26 per foot. So do you see renewal or new leases to be in line with these rents? Or do you see some downward pressure there?
It all depends on the market, and every market is different from the other. So it's hard to answer that question. But we don't see any massive regression in weighted average rents across the board. Certain assets are different than others.
Sure. And how was your experience in 2019? I mean, if you were to say expiring rents versus the new rents, would you say they were pretty much in line? Or did you see some pressure on your leases in 2019?
Again, it depends on the market you're speaking to. Some properties were stronger than others. But overall, we were effectively holding the line on renewal rate retention per square foot rates.
Sure. Okay. Okay. That's fair enough. And then maybe just moving on to the development side. You talked about the project The Centre. So you mentioned full-scale renovation. How much are you planning to spend? And what kind of returns are you underwriting?
So what we've disclosed in the MD&A is that, that asset is going through a full-scale renovation. So that renovation is approximately $20 million. So that's all that the scope involves -- renovation, wholesale, both exterior and interior mall improvements.
Okay. Okay. And then maybe just quickly on the Pine Centre Mall. I know you gave some update in terms of progress. I think Lowe's is expected to close a store in that mall. When does your lease expire with them? And does that change things in terms of lease-up expectations on the redevelopment side?
So Lowe's expiration is until the tail end of 2023. It's unfortunate that they decided they want to close that location. It had no impact on our leasing momentum with respect to the redevelopment of the Sears box. Leasing in general has not been impacted. So we'll work with them to understand their motivations on a go-forward basis once they close. We're actively looking at options on redeveloping the space to the extent we go that route.
Sure. And maybe just last question from me. In terms of unit buyback, I mean, where does that sit in terms of your priorities? Or do you think development or redevelopment is a better place to add value and allocate capital to?
Well, we do have the buyback program in place, as you've noted. We do assess that as blocks and opportunities come up from time to time. But it really is just a situation where we're looking at it based on the merits of where the share price is at and such. So it's...
[Operator Instructions]. At this time, we have no further questions registered. Please proceed.
Okay. Thank you for attending the call, and have a good weekend, everybody.
Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. We now ask that you please disconnect your lines.