Morguard Real Estate Investment Trust (MRT.UN), a significant player in the real estate investment sector, has disclosed its fourth-quarter financial results for the year ending December 31, 2023. The Trust's net operating income (NOI) for the quarter stood steady at $33.4 million, mirroring the previous year's figures. However, the full-year NOI saw a 3.1% increase to $126 million, bolstered by improved retail income and a substantial property tax refund. Despite these gains, the Trust's funds from operations (FFO) fell by 17% to $15.7 million, attributed mainly to increased interest expenses. Occupancy rates experienced a slight dip to 90.3%, with the multitenant office sector facing downturns. Looking ahead, Morguard REIT anticipates higher capital requirements and is actively pursuing leasing opportunities in both retail and office spaces.
Key Takeaways
- Fourth-quarter net operating income remained unchanged year-over-year at $33.4 million.
- Full-year net operating income rose by 3.1% to $126 million, aided by retail income growth and a one-time tax refund.
- Funds from operations declined by 17% due to higher interest costs.
- Occupancy levels slightly decreased to 90.3% amid office market challenges.
- The Trust reported a fair value loss of $43 million on real estate properties for the quarter.
- Executives expressed confidence in the retail segment's resilience and future performance.
Company Outlook
- Morguard REIT anticipates increased capital needs moving forward.
- The Trust is actively engaged in discussions to boost leasing in retail and office sectors.
- Positive performance in the enclosed mall and retail segment is expected to continue.
Bearish Highlights
- Same asset net operating income saw a 1% decline in the fourth quarter, driven by weaker multitenant office income.
- A fair value loss of $43 million was recorded on real estate properties during the quarter.
Bullish Highlights
- The Trust experienced an increase in same asset retail income and a one-time property tax refund.
- Executives remain optimistic about the retail sector's rebound and anticipate positive same-store results in the coming year.
Misses
- Funds from operations suffered due to increased interest expenses.
- The Trust's net asset value is currently higher than the market price of their stock, indicating a potential undervaluation.
Q&A Highlights
- Rezoning process for Berquitlam Plaza is underway, with hopes for the first reading in 2024.
- The company is monitoring the stock market price and may consider share buybacks in the future.
- A suggestion to buy back shares at a lower price was discussed but ultimately found unproductive.
- Caution is advised for 2024, with the overall economy's health being a significant factor.
Full transcript - None (MGRUF) Q4 2023:
Operator: Good afternoon, ladies and gentlemen and welcome to Morguard Real Estate Investment Trust Fourth Quarter for the Year Ended December 31, 2023 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] This call is being recorded on Thursday, February 15, 2024. I would now like to turn the conference over to Andrew Tamlin, Chief Financial Officer. Please go ahead.
Andrew Tamlin: Thank you and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT’s fourth quarter 2023 earnings conference call. I am joined this afternoon by John Ginis, Assistant Vice President of Retail Asset Management; Tom Johnston, Senior Vice President of Western Asset Management; and Todd Febbo, Vice President of Eastern Office Management. Thank you all for joining – 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 fourth quarter 2023 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, again, pleased with the fourth quarter results, which were slightly mixed in their tone, but are pleased with the levels of leasing momentum we are seeing. Net operating income for the quarter was flat at $33.4 million as compared to $33.5 million last year due to steady net operating income results in the retail asset class. Broken down by asset class, both retail and office, were flat for the quarter as compared to a year ago as well. Net operating income for the year ended December 31st, 2023 increased 3.1% to $126 million from $122.2 million due both to the increase in same asset retail income, plus a one-time property tax refund received in the first quarter for one of the Trust’s and Co.’s regional centers in the amount of $2.8 million. This related to vacant space in past failed tenants such as Target (NYSE:TGT). FFO for the quarter decreased 17% to $15.7 million in 2023, as compared to a year ago due to higher interest costs on the Trust’s short-term or variable rate debt. Same asset net operating income for the fourth quarter declined 1% due to a decline in multitenant office income resulting from higher vacancy. For the year, our same asset net operating income increased 1%, void from our retail results. Interest expense has increased 22% to $17.2 million for the quarter on a year-over-year basis. The impact of $12 million lower debt on a year-over-year basis has been offset by higher short-term borrowing costs due to the higher interest rate environment that we find ourselves in. Higher interest costs on renewals of mortgages have also been a factor. The Trust has approximately 19% of its debt as variable at December 31st, 2023, which is up slightly from approximately 18% from a year ago. The Trust will continue to monitor this and would expect to see it somewhat elevated in the near future. Our enclosed model results continue to rebound from the downturn we saw under COVID. We are continuing to see increases in sales per square foot on a year-over-year basis and a quarter-over-quarter basis. In the fourth quarter, we have seen more than half of our enclosed malls have double-digit percent increases in sales per square foot as compared to 2019. Pine Center in Prince George, Shoppers Mall in Brandon, St. Laurent in Ottawa, and The Center in Saskatoon are all seeing these increases. This has led to positive rental growth upon renewals for tenants at our enclosed mall assets. We are continuing to see a bounce back of the performance of these assets. During the quarter, we had a $43 million fair value loss on our real estate properties, which was attributable to a 25 basis point increase in cap rates for our office asset portfolio. This compares to $113 million fair value loss for the quarter a year ago. The PCME or operating and leasing capital reserve was established to be $25 million for the year. Actual spending was $36 million, which was anticipated due to enhanced leasing capital this year and some catch up maintenance capital deferred under COVID. We are still expecting elevated capital needs above the reserve amounts in future quarters into 2024. Our overall occupancy level of 90.3% at December 31st is relatively unchanged from last quarter and down slightly from 90.6% a year ago. This decline is all attributable to the softness in the office market, which continues to see its challenges. We are seeing this downturn primarily in our Ontario office assets, where our office assets out west are holding occupancy or even increasing. And now for an update on our leasing efforts. In 2024, there’s – approximately 390,000 square foot – square feet in retail GLA and 231,000 square feet in office GLA coming due. We do expect that every retail tenant larger than 5,000 square feet to renew their space. We also believe that every office tenant greater than 5,000 square feet to renew with the exception of one 5,000 square foot tenant that is expected to vacate. Looking ahead to 2025, I note that we have 525,000 square feet in space at Penn West Plaza coming due. We are actively working with these tenants to determine their needs beyond this date. Presently, we’ve renewals for more than half of this space and we’re having good conversations with all tenants. This will become a multitenant building at that point. We will be providing further updates on these renewals in future quarters as these discussions get sorted out and continue. Leasing discussions for both office and retail opportunities have definitely picked up in the last year as both current and prospective tenants now have a better handle on what to expect going forward post-pandemic. This has led to numerous conversations about various opportunities at our properties across the country. Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal back on December 31st, 2020 and is now in our over hold. We have recently had some better back and forth discussions, but this is still going slowly. Turning to financing loan liquidity, the Trust has $101 million in liquidity at the end of the fourth quarter, which is down from $121 million at the end of 2022. From a financing perspective, during the fourth quarter there was a scheduled pay down of $8 million from the Penn West Plaza renewal completed a year ago, and further, there was a $30 million pay down required for renewing a mortgage on an enclosed mall. There are no mortgage renewals until Q2 of 2024. No further mortgage renewals. From a development standpoint, we are especially pleased with the results from Pine Center in Prince George, British Columbia. This mall now has a new Save-On-Foods grocery store which is opened at the end of September. That has led to other leasing opportunities in this mall, including Lululemon (NASDAQ:LULU), Sephora, H&M (ST:HMb) and others. The addition of grocery further complements the strong anchored tenant profile at this mall. The Trust has also announced a remerchandising development project at St. Laurent. This is intended to strengthen the tenant mix and promote long-term growth through targeted investment in – discriminatory retailers. This cost is expected to be approximately $13.5 million and is expected to take 24 to 36 months to complete. The Trust is continuing to have conversations with these new tenants for the mall and also – existing tenants with possibly expanded space. Wrapping up, we are pleased at the resiliency of our assets and the improved results and activity levels from our enclosed mall and retail segment. We are pleased with the positive results we’ve seen in the last year. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery anchored, have performed well. Beyond our retail assets, we have high quality office buildings in Canada’s largest markets with a high degree of government office tenants. We continue to be positive about their business and the objective of building value for our unitholders. We look forward to continuing to execute our strategy and thank you for your continued support. Thank you. We’ll now open the floor to questions.
Operator: Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD (TSX:TD) Cowen. Your line is open.
Jonathan Kelcher: Thanks. Good afternoon. My first question, I guess just on the retail. January – December, January, February, kind of that time of the year. Is there anybody on your – any tenants on your watch list?
John Ginis: Hey, Jonathan, it’s John here. The only one that we’re trying to pay attention to is the bay. You saw, I’m not sure if the headlines that you follow that would suggest that they were short paying their suppliers in the fall of last year, and also they were also short paying some landlords or late on their payments for rent over the last few months, us included. So, in terms of larger format tenants, that’s the one we’re trying to pay attention and see what happens over the course of calendar ‘24. But outside of that, there’s nothing that stands out that would suggest that there’s an – imminent restructuring or something to that effect.
Jonathan Kelcher: Okay. And then so no – nothing on your list, so – that is good. And then just on Penn West Plaza, and I know you talked a little bit about it, but how – that lease for the whole building comes up February next year. How full is that building? How much subleasing has Obsidian done?
John Ginis: So the building is actually pretty full right now. It’s in the range of 90% to 95% occupied. So there’s a real good mix of subtenants that are there now. And we’ve had good conversations with a lot of them, and we’re continuing to have conversations with the rest. So I think that the plan is to continue with that and provide further updates on how those are going in future quarters, Jonathan.
Jonathan Kelcher: Okay, but I think it’s fair to say that there’ll be some sort of NOI roll down beginning in Q1 next year?
John Ginis: Yeah, there will be. It’s probably in the range of $10 million to $15 million adjustment to –
Jonathan Kelcher: Annually?
John Ginis: Annual net operating income – yeah, annually. And that’s just really from the reset of all the lease rates.
Jonathan Kelcher: Okay. And then on – lastly just on the Berquitlam Plaza, maybe give a little bit of color on that, maybe is it timing on the application you have? And how long you – you could to do that? And maybe what you plan on doing with the property after that goes through?
John Ginis: Hey, John. It’s John Again. So we have been immersed in a rezoning process for that property for years now. I think it's dating back to 2017, 2018. We’re trying to get the first reading. There’s four REITs necessary in order to get a property rezoned before that would then permit us to reevaluate options on the asset. It hasn’t been easy, but notwithstanding the conceptual side of calls for the [direction of] [ph] six towers over two phases. But again, we don’t want to speculate here. At the end of the day, the first thing is to get the rezoning done. And our hope is that we get the first reading at some point in 2024.
Jonathan Kelcher: Okay, so that's still laid away.
Andrew Tamlin: Yeah. I would just add I mean, there’s been challenges with agendas of certain counselors and just similar challenges to other developers that are trying to push forward projects these days. So it’s not really that uncommon. We still feel good about getting the approvals. It’s just going to take time. And beyond that, we don’t really have any set plans as far as how we’re going to move ahead with the development. We’re just focused on the entitlements for right now.
Jonathan Kelcher: Okay, that’s it for me. I'll turn it back. Thanks.
John Ginis: Thanks, Jonathan.
Operator: Thank you. [Operator Instructions] Your next question comes from the line of [Charles Zabaco] [ph] from Charles Investment. Your line is open.
Unidentified Participant: Hi, thank you very much for taking my call. My first question is about your net asset value. Could you please tell me what is it now, please?
Andrew Tamlin: It’s in the range of $16. $15, $16.
Unidentified Participant: Okay. So as a business, when you see your net asset value is so high like this on a consistent basis for this particular company? And when you compare these prices to how much your share price is worth. And I think it's like almost 70% discounted. Does that bother you?
Andrew Tamlin: Sorry, is there a question there? I’m not sure I caught that.
Unidentified Participant: Yeah, I said your net asset value is heavily discounted in the market based on the price of your stock. Now I’m saying, does that – are you concerned when you see that? Does that bother you? The fact that your net asset value is not showing – it’s not properly assessed by the market.
Andrew Tamlin: Well, I think we’ve been challenged similarly to other real estate companies and real estate trusts. So we have little control over what the market is doing these days. A lot of the – a lot of our peers are also struggling from a share price perspective and we’re obviously monitoring that. But there’s limited opportunity that we can do to impact that.
Unidentified Participant: I think for this particular company, I’ve been with you guys for so many years and it has always been like this. This company always trade at a very massive discount to its net asset value, even before the pandemics. And that brings me to the question of why don’t you buy back your shares? Like for the whole of last year, not a single share was bought back by the company. What’s the reason for that?
Andrew Tamlin: Well, we will look at that. We evaluate all opportunities and for now we’re focused on a number of different things and we’ll consider that going forward. Thank you.
Unidentified Participant: Well, you don’t need to consider it. It is something that you should do. If you truly believe in your net asset value, it’s $16, right, as you said. You can buy back at less than $5.30 or $5.40. Why don’t you do that? That gives more value to your money. You know what I’m saying? Like this happens a lot for this company and it’s just like – it is mindboggling.
Andrew Tamlin: Excuse me, I think we need – operator, we need to move on. This isn’t a productive conversation. Thank you.
Unidentified Participant: No, I disagree with you. It is productive.
Operator: Thank you. And your next question comes from the line of Tom Callaghan from RBC (TSX:RY) Capital Markets. Your line is open.
Tom Callaghan: Hey, good afternoon, guys. Just wanted to switch back to the retail side of things. You talked a bit about it in your prepared marks there, but just curious, where you think retail leasing spreads could fall in 2024? And more broadly, what do you guys think is reasonable in terms of same property performance within that asset class?
John Ginis: Hey, Tom, it’s John. So the last 20 months have been pretty good in terms of retail rebound. Andrew obviously touched on that in his remarks. We’ve seen exceptional results with quarter-over-quarter same asset growth in our retail portfolio. Really no one really knew how we were going to come out of the pandemic. So clearly we came back strong, which is encouraging. There’s nothing that we foresee that would stop consumers from continuing to freak at malls. The only real outlier or concern we have is, where the general economy goes, and that’s something that we’re obviously paying attention to. But it varies depending on the municipality you’re talking about. Andrew again noted during his remarks about certain assets like out west in Prince George, where there’s been exceptional growth and demand from retailers that you want as part of your revenue in the tenant roster. But that’s not – it’s not uniform across the country. In terms of leasing spreads, the good news about retail is, it’s irreplaceable. And given what construction costs are today, what retailers are doing is, they’re trying to survey the market to find opportunities. And where they can’t build, because it’s too expensive, they look at existing stock, hence the demand that’s coming back into the malls. So we feel pretty good about it. The last two years have been great, but we’re being more cautious for calendar ‘24.
Tom Callaghan: Got it. Thanks. That’s helpful.
Andrew Tamlin: I would just add, Tom, that we have seen positive leasing spreads now for a good chunk of time, both for the quarter – itself and for the year, I would expect that we would see positive same-store results for the retail segment. What that exactly looks like, it’s tough to know, but we feel good about retail.
Tom Callaghan: Great. Thanks, guys. I’ll turn it back.
Operator: Thank you. And there are no further questions at this time. I would like to turn it back to Andrew Tamlin for closing remarks.
Andrew Tamlin: Okay. Thank you, everybody for joining the call, and we’ll look forward to chatting with everybody next time. Thank you.
Operator: Thank you, presenter. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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