MGRUF - Morguard Real Estate Investment Trust (MGRUF) CEO Rai Sahi on Q2 2022 Results - Earnings Call Transcript
Morguard Real Estate Investment Trust (MGRUF)
Q2 2022 Earnings Conference Call
July 28, 2022, 04:00 PM ET
Company Participants
Andrew Tamlin - Chief Financial Officer
John Ginis - Assistant Vice President, Retail Asset Management;
Tom Johnston - Senior Vice President of Western Asset Management
Tullio Capulli - Senior Vice President, Asset and Property Management and Leasing
Rai Sahi - President; Chief Executive Officer; Chairman Executive Board
Conference Call Participants
Jonathan Kelcher - TD Securities
Tom Callaghan - RBC Capital
Presentation
Operator
Good afternoon, ladies and gentlemen. And welcome to the Morguard Real Estate Investment Trust Second Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Today's call is being recorded. Thursday, the 28th of July 2022.
And I would now like to turn the conference over to Mr. Andrew Tamlin, Chief Financial Officer. Please go ahead, sir.
Andrew Tamlin
Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT second quarter 2020 earnings conference call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Senior Vice President of Asset and Property Management in Western Canada; Tullio Capulli, Senior Vice President, Asset and Property Management and Leasing in Eastern Canada, 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 jump into the call, I would like to point out that our comments will mostly refer to the second quarter of 2022 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 make on this call.
Overall, we are pleased with the second quarter results, which showed continued improvement in same asset metrics over last year, as well as the recording of $12.3 million in fair value gains across our asset portfolio, mainly driven by increases in asset values in our strip mall portfolio.
Net operating income for the quarter increased to $29.7 million in 2022 from $29 million in 2021 due to continued improvements in our enclosed mall portfolio results. FFO for the quarter increased 8% to $16.2 million in 2022 from $15 million in 2021 due to the improved net operating income for the quarter, as well as continued interest savings from a decline in debt of $43 million from a year ago.
Same asset net operating income for the second quarter improved 4% from a year ago, buoyed by a 15% increase in same asset results for our enclosed mall portfolio. This represents the fifth quarter in a row where we've achieved improved same asset results on a year-over-year basis.
We have seen continued declines in interest expense, which declined another $300,000 this quarter and $600,000 for the six months due primarily to the decline in debt on a year-over-year basis.
As mentioned, our enclosed mall results continue to rebound. This is mainly driven by our malls located in Western Canada, which have seen rebounds in traffic and sales, which has translated into increases in percentage rent and specialty leasing opportunities on.
We are also pleased that opportunities of discriminating tenants such as Lululemon [ph] and Sephora at some of our Western Canada locations. These additions are solid endorsements to both our tenant and customer base.
We are still seeing challenges in our two Ontario malls due to the numerous lockdowns imposed by the province over the last few years. We are, however, heading the right direction and look forward to improved results in Ontario - as Ontario traffic and sales continue to rebound.
Rent collections are for the most part back to normal with the exception of the two Ontario enclosed mall that have been running recently at approximately 95%. The tenants that are circling in Ontario continue to be personal service tenants and food court tenants.
The rent arrears and deferrals continue to decline since December 31st, 2021, although there is still further work to do. Receivable balance for tenants have decreased from $9.2 million at year-end, down to $7.6 million at the end of the second quarter.
Most of the uncollected overdue amounts have been fully allowed for, but there is still cleanup needed to be document, abatements to be granted. And the vast majority of these amounts are outstanding from Ontario mall.
The REIT's PCME, or operating and leasing capital reserve was established to be $25 million for the year, which is back to normal levels. We spent only $6.8 million of the 12.5, 6-month allocation, but we do expect to be more active on the spending in the back half of the year, which is typical for us.
Our overall occupancy levels of 91% at June 30th remained relatively unchanged to both year-end and a year ago. This compares favorably to the roll - to the rate from the beginning of the pandemic, which was 93%. This speaks to the fact that in most cases, we've been able to keep tenancy at our quality assets.
And now for an update on our leasing efforts. For the rest of 2022, there's approximately 253,000 in retail GLA coming due. We feel good about the renewal of the vast majority of this base with renewals already completed for any space over 10,000 in GLA.
We also have approximately 212,000 in office GLA coming due over the next six months. Approximately one half of this represents a single tenant government lease in Santorini [ph] Vancouver. This has been renewed for 10 years and moves from an expiring rate of $25 per foot to an average of $27.50 per foot over the 10 years.
Leasing discussions for retail opportunities have definitely picked up over the last six months as tenants now have a better handle on how they will be operating. Office leasing discussions are still somewhat muted, as tenants are still trying to figure out what their office needs will be like in the long term in a post-COVID world.
Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal on December 31st, 2020, and is now an overhaul. While they have verbally told us that they expect to renew they have unfortunately still been focused on their response to the pandemic, which has taken priority. At the point, we are looking at later in 2022 in order to get those completed. Our experience is pretty similar to other landlords who have provincial government as tenants.
Turning to financing and liquidity. The trust has $165 million in liquidity at the end of the second quarter and $329 million in unencumbered assets. This liquidity position has increased from $142 million a year ago.
It has been a pretty quiet time from a financing perspective over the first six months, but there are a few mortgage renewals we are working on that come due in the last six months of the year.
We do expect a net pay down from these mortgages, but we do have ample liquidity to be able to handle this. We will have further line of sight on this when we get to the third quarter reporting cycle.
The trust is continuing with the Save-on-Foods development job at Pine Centre, which entails the re-tenanting of the MD Lowe's premises into a new 38,850 square foot Save-on-Foods grocery store. Demolition [ph] of the existing former Lowe's premises is now complete, and we're arranging for sub-trade and material deliveries and starting construction. This is expected to be completed early next year.
The addition of grocery further complements the strong anchor tenant profile at this mall and has advanced leasing discussions with some discriminatory tenants looking to come into this marketplace.
Wrapping up, we are pleased with the resiliency of our assets and the improved results from our enclosed mall and retail segment, while there is still room to grow to get back pre-COVID result. What we have seen in the last year has been positive. We are looking forward to continued positive leasing conversations for our assets and most of our enclosed malls remain dominant in their geographical area. And our strip malls, which are largely grocery incurred have performed well in the pandemic.
Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of the government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continue to execute our strategy, and thank you for your continued support. We will now open the floor to questions.
Question-and-Answer Session
Operator
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Jonathan Kelcher of TD Securities. Please go ahead, sir.
Jonathan Kelcher
Thanks. Good afternoon. First, just a little clarification there, Andrew, on your comments. Did I hear correctly that you have 253,000 square feet of retail expiring over the balance of this year?
Andrew Tamlin
Yeah, that's right.
Jonathan Kelcher
Okay. So that exhibit you have in the MD&A that says 650 is sold roughly 400,000 square feet is month-to-month? Is that how we should think about that?
Andrew Tamlin
Yeah. There is a significant amount that’s either month-to-month or specialty leasing, that sort of thing.
Jonathan Kelcher
Okay. That's helpful. And secondly, just on the gain, the IFRS gain you had on the strip retail, what drove that? Was it higher cash flow assumptions? Or is cap rate change or - or what drove that?
Andrew Tamlin
Yeah. It was really some cap rate adjustments for that portfolio. And as our valuation department, it's looked at comparables they thought it was appropriate to do that.
Jonathan Kelcher
Okay. And then just lastly, for I guess, for you, Ray. Just given the current discount, we're starting to see more REITs do this. But what are your thoughts on an NCIB for Morguard REIT?
Rai Sahi
I think we still have NCIB there. So I will take a look at it, whether we will use it or not.
Jonathan Kelcher
Okay. So no real current plans and obviously, no plans to be aggressive with it?
Rai Sahi
Well, I wouldn't say no plan to be aggressive, we're aggressive with just - not a proper word I believe, we always looking at on an ongoing, whether - it depends on what becomes available.
Jonathan Kelcher
Okay. That's – Mr. Rai…
Rai Sahi
That's, okay.
Andrew Tamlin
I think that was it Jonathan, yeah.
Jonathan Kelcher
Yes, okay. I'll turn it back. Thanks.
Andrew Tamlin
Okay. Thank you.
Operator
Your next question comes from Tom Callaghan of RBC Capital. Please go ahead.
Tom Callaghan
Hi, good afternoon. Just curious with respect to occupancy and just given some of the leasing commentary that you made in your opening remarks, Andrew. Just curious if you have a view as to where occupancy kind of may trend here over the next six months into year-end?
Andrew Tamlin
It's been very stable, Tom, over the last few years under COVID. So I really wouldn't expect too much the way of changes of occupancy. As I mentioned, we've had pretty good - we have a pretty good line of sight to the major renewals coming up from a retail perspective. And a lot of the heavy lifting has been done already on the office as well. So I don't really expect too much the way of changes.
Tom Callaghan
Got it. Makes sense. And then just one more from me. Maybe any commentary and trends you're seeing with respect to TIs and particularly on the office front and how those may have evolved since the start of there is there been any movement from the tenant perspective and what they're looking for?
Andrew Tamlin
Yeah. I don't know, Tullio, do you want to handle that? Or Tom, one of you.
Tullio Capulli
Tullio, here. Yeah. I mean the TIs are regarding the creep [ph] up a little bit. It hasn't gone up that much at this point in time. But everybody is competing for a lower pool of tenants at this point until people figure out what they need and how much space they need and we go from there. But we're - we don't anticipate it to be huge, but we will be competitive with any deal that we think is appropriate to be done.
Tom Callaghan
Got it. Thanks. I'll turn it back.
Andrew Tamlin
Thanks, Tom.
Operator
[Operator Instructions] Mr. Tamlin, there are no further questions from the phone line, sir. Please go ahead with your closing remarks.
Andrew Tamlin
Okay. Thank you, everyone, for joining the call. And look forward to seeing everybody next quarter. Thank you.
Operator
Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for participating and ask that you please disconnect your lines.
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Morguard Real Estate Investment Trust (MGRUF) CEO Rai Sahi on Q2 2022 Results - Earnings Call Transcript