Watch the Retail REIT – Fund President Q3 2023 Update
Transcript
Ray Punn: [00:00:26]
I’m happy to provide you with the Skyline Retail REIT update for Q3 2023. Joining me here today is Gord Driedger. He is the President of Skyline Retail REIT. Gord, thanks for joining me.
Gordon Driedger: [00:00:36]
Thank you.
Ray Punn: [00:00:36]
Let’s get right into it. Gord, as usual, the first question: give us an update on the last quarter, which was quarter three.
Gordon Driedger: [00:00:42]
So, for reference, today is November the 15th, 2023. And I say that because when you’re watching this video, it may seem to you that we’ve talked about similar things last quarter, and it’s true.
We had a very similar quarter, a very strong quarter. And we have a number of different levers that we pull throughout the quarter and throughout the year from a revenue perspective, from an expense perspective, from an interest rate perspective. And so, we continue to work on all of those metrics, and it was a very strong quarter for the REIT from virtually all of those metrics.
We have a very relevant portfolio of, as everybody knows, grocery, pharmacy, and everyday essentials tenants representing everyday needs of consumers. That’s important, and continues to be important, because it’s less discretionary from an expense perspective, from the consumer’s perspective. These are tenants they need to frequent, irrespective of what’s happening in the market.
Today, for example, two of our major tenants – actually, three of our major tenants, when you include Shoppers Drug Mart and the Loblaws portfolio – posted their profits. And they are doing exceptionally well for all kinds of reasons. But they are our major tenants, and it’s important that our major tenants are doing exceptionally well because they continue to invest in their businesses and of course, to pay their rent.
Our occupancy rate in the quarter was 97%. That’s been consistent throughout the year. So, that’s a very high occupancy rate. Tenants do come and tenants do go. But from a leasing perspective, that’s a very good rate.
In addition to that, we have committed tenants. So, these are tenants where leases have been concluded. They are binding, but they’re not yet in place. So, our committed occupancy rate for the quarter was 98.4%. So, that’s really a very high-occupancy, very low-vacancy rate throughout the quarter.
As I’ve discussed in the past, we have several different ways of earning income and growing our income. One of the main ways, though, is that especially with a high occupancy rate, we can lease vacant space. And we do. But as the vacancy declines, there’s less opportunity there. The good news is that 85% (this is as of the end of the quarter; it’s actually closer to 100% toward the end of the year as we approach the end of the year) – but a very high percentage of our tenants are renewing their leases. To the end of the quarter, the average rental increase – and this is the difference between the expiring rent of somebody’s lease and their renewal rate – is about 7.7%. So, that’s the increase from the same tenant in the same space. That’s a very high rate relative to our industry and also relative to history in our sector.
We’ve also renewed 21% of our leases for 2024. So, these are leases that are expiring in 2024. About 21% of those have already been renewed. And the average on those renewals from expiring rents to new rents is about 11%. Again, a very good rate of increase.
The other lever that we pull, and we have over the last 3 or 4 years, is to build incremental spaces on our existing shopping centers. So, we continue to build out the retail development, high-quality income. So, these are tenants like Starbucks, Rexall, and LCBO. So, we’re adding these new-build spaces to our existing shopping center portfolio. High-quality rents, fully leased at the time we commit to to the capital expenditure. Because of that, they’re fully leased, fully costed, and because of that, relatively low-risk in terms of our income creation. These create more attraction to our shopping centers to make them even more dominant within the trade areas, more traffic, better rents from existing tenants – all around, a very vibrant community center.
Ray Punn: [00:05:31]
Great. Thanks for sharing that, Gord. So, you talked about strong leases with some of our tenants. You’ve talked about a high occupancy. You’ve talked a little bit about development. As we look forward, whether for the fund itself or the market, is there anything else that you want to share?
Gordon Driedger: [00:05:49]
From an acquisitions perspective, it’s been a relatively slow year. 2022 was our biggest acquisitions year. 2023 has been markedly slower, and that’s really a function of opportunity. With rising rates, there have been fewer opportunities for us to acquire. And that’s fine. We’ve hand-picked the portfolio that we have already, so we’ve been very patient on the acquisition side.
We’ve been very conservative to date when – from a mortgage financing perspective, we’ve been conservative. When rates were low, we pulled forward a bunch of mortgages to renew early, which we did and for long terms. So, that was a good move that we did about 18-24 months ago. And so what that means for 2024, the REIT has less than 9% of its mortgages renewing, which is – you know, we typically aim for approximately 20% a year on a laddered basis. So, it’s a smaller year next year, which is great timing as rates begin to moderate, and then we can kind of step forward in 2025, hopefully when rates have moderated, as we’re expecting them to do.
In addition to the mortgage discussion, it’s important to know that even though we do have to renew mortgages in this higher interest rate environment, the average weighted interest rate on our existing mortgages has moved about 20 basis points. And that’s since the mortgage increase cycle commenced. So, that’s 0.2% on an average weighted basis. So, that’s an important factor.
But yes, rates are higher. Because we move forward with so many mortgages, we’re in an enviable position of not having to renew as many mortgages in a higher rate environment. We’ve also taken advantage of the relative inactivity in the market to dispose of a small number of assets. And with supply and demand being a factor in every business, the assets that we brought forward for disposition, although a very small number, we’ve done very well with them in the sense that there is appetite for good-quality retail projects. And we’ve capitalized on that value by disposing of a small number of assets that were either geographically orphaned or no longer fit the go-forward position of the retail portfolio.
So, all in all, it was a very solid quarter. We discussed our 2024 plans today. It’s very, very good. Occupancy remains very high. Tenant interest rate remains very high. And that’s the top line of income generation. And that’s what drives the success of the REIT.
Ray Punn: [00:09:05]
That’s a great update. Thanks for sharing that, Gord, and thanks for joining me today.
Gordon Driedger: [00:09:09]
My pleasure.
Ray Punn: [00:09:09]
With that, Skyline Retail REIT is currently open for new investment. If you have any questions, please connect with your Skyline Wealth Management representative or simply email us at Invest@SkylineWealth.ca. Okay, thanks for watching.