Retail REIT – Fund President Q1 2024 Update Transcript

May 9, 2024

Watch the Retail REIT – Fund President Q1 2024 Update

Transcript

[00:00:55] Ray Punn:

I’m pleased to provide you with Skyline Retail REIT‘s update for quarter one 2024. Joining me here today is Gord Driedger. Gord, thanks for joining me.

[00:01:03] Gordon Driedger:

Pleasure to be here.

[00:01:03] Ray Punn:

Gord, I understand we’re starting with an announcement.

[00:01:05] Gordon Driedger:

Thanks, Ray. I’d like to take this opportunity to introduce, again, our Vice President of the Fund, Craig Leslie. Craig currently oversees asset management for the REIT and has joined us from Morguard REIT, where he spent the previous six years overseeing the asset management of their national grocery-anchored retail portfolio, in addition to various enclosed malls nationally.

Prior to this, Craig was at RioCan and also spent six years with Deloitte, both in the UK and Canada, having originally trained as an appraiser with CBRE before moving into the investment side with Cushman & Wakefield. Craig is a member of the Appraisal Institute of Canada and the Royal Institution of Chartered Surveyors.

At this point, I also have the pleasure of congratulating Craig. After a hugely rewarding period with Skyline, I will be stepping down at the end of June and Craig will be stepping into the role of President from July onwards.

I want to express my sincere gratitude to everyone at Skyline for the incredible journey we’ve had together. It has been an honor to serve as President, and I’m immensely proud of what we’ve achieved as a team. I have full confidence in Craig’s leadership abilities, and I know he will bring fresh perspectives and a drive to continue Skyline success. Thank you all for your unwavering support, and I look forward to witnessing the growth and prosperity of Skyline under Craig’s guidance.

[00:02:27] Craig Leslie:

Thanks, Gord. Really looking forward to stepping into the new role in July. I’m hugely grateful for both Gord’s support and leadership in building the REIT into what it is today. We have a great team in place, and I’m optimistic that we’ll be able to continue that success and drive future growth for Skyline’s investors.

[00:02:46] Ray Punn:

Gord, thanks for sharing the announcement. Craig, I’d like to congratulate you on your new appointment. And with that, I’m going to come to you and ask you for an update on quarter one.

[00:02:53] Craig Leslie:

Thanks, Ray.

Another good quarter in Q1. Results, really just reinforcing a pattern that we’ve seen over an extended period now. And that pattern is strong resiliency in the face of what’s, I think, undoubtedly been a bit of a slowdown in the economy, and also growth. Net operating income in Q1 is holding to budget and committed occupancies over 98%. So, Skyline is also continuing to see strong rental uplifts at renewal. And all of that’s translating into really robust operating performance, which is really pleasing.

[00:03:28] Ray Punn:

That’s great. So strong rents, strong leasing, and strong occupancy. That’s what I’m hearing. So, sounds like it should be a good time to be in retail.

[00:03:36] Craig Leslie:

100%. If you’re in our type of retail, it’s a great time to be here. Our performance, I think for me, really just reinforces that the fundamentals are just so strong in this sector. It’s a classic supply-demand imbalance. We’ve got a growing population. We know Canada’s seeing record growth. We know we’re seeing record immigration. All of all of those people need essential retail to be serviced. And the majority of that growth will happen in the major urban areas.

But what we’re seeing is a bleed of that into our markets, into the smaller markets, because when people arrive in Canada, they don’t necessarily, the cost-of-living crisis is real. So, when they come in, that crisis is headlined by housing cost and people move out of those major urban centers into our markets because they’re in search of more affordable housing. They’re maybe looking for a shorter commute, even a perceived better quality of life.

I think really when you take those fundamentals that are underpinning the population growth and you contrast that with where we are in the construction site. Now, construction costs during Covid spiked and they moderated slightly, but they’re still elevated. And what’s happened there is we’ve seen, actually comparative to a historical level, we’ve actually seen less retail being delivered into the market over ’21, ’22, ’23. So, on one hand, we’re seeing record population growth and on the other hand, you’re actually seeing below average delivery of new retail space. And that’s creating that that competitive environment for tenants which ultimately leads to rising rents.

From an investor’s perspective as well, there’s a real lack of volatility in our portfolio. The vast majority of those tenants are engaged in providing goods and services, essential goods and services, and really, that demand never fluctuates based on the point in the economic cycle, because essential retail is just that. It’s essential.

[00:05:52] Ray Punn:

Thanks for sharing that, Craig. It’s good to hear that the fundamentals are in good shape for the Retail Fund. Gord, let’s come back to you. Let’s talk a little bit more about what else is going on in the Fund right now.

[00:06:00] Gordon Driedger:

One area worth highlighting is the role of adding accretive spaces to our shopping centers. As we’ve talked about in the past, there are really three ways of getting additional income from our shopping centers.

First is to lease vacant space, and we’ve done a very good job of that. Our occupancy is very high.

Second is to get additional rent on a lease renewal. That occurs, give or take, every five years. The renewal rate rents that we’re getting from our current tenants, who by and large, renew in our shopping centers, is at the very high end of the scale in terms of what we’ve been experiencing over the last couple of decades of retail in Canada.

The third way is to build incremental new retail space in our shopping centers. As we’ve talked about in the past, we have dominant retail assets in growing markets where new retail wants to come and existing retail wants to relocate.

In Elmira, for example, in early 2016 we bought a grocery-anchored shopping center with surplus land and, as we know, when we buy shopping centers, we buy it on the basis of existing income. So we aren’t paying for future income. We’re paying for existing income.

[00:07:22] Gordon Driedger:

Since January 2016, incrementally we’ve received approvals to build 27,000 square feet of additional space. We’ve built it over the last two or three years, starting with a new build Rexall, a Pet Valu, and we finished recently with an LCBO relocation from elsewhere in Elmira as well as about 7000 square feet of additional retail.

So the LCBO, for example, had lots of opportunity to relocate in Elmira but they picked the most dominant asset (food-anchored, convenience-oriented, well maintained, well looked after, well run shopping center) to make their relocation. So in doing so, we took an $11 million asset that we paid in 2016, to a $23 million asset most recently. And in doing so, we’ve added value in a relatively low risk way.

We never start construction, never commit to construction on a new build development, until A) we have leases in place, binding leases, and B) we have it fully costed. So, in development terms, we’re not building product on spec, we’re not building it hoping to lease it. We are building it knowing what the rent is going to be. We are building it knowing what the construction costs are going to be. It takes a lot of the risk out of it.

[00:08:55] Ray Punn:

So, Craig, let’s close it out with you. I want to give you the opportunity to close this Q1 update out. Is there anything else to look forward to?

[00:09:02] Craig Leslie:

Okay. I think the main takeaway here that I think is important for investors to understand is that we have a great platform, it provides both stability and growth. We have a largely recession proof sector. We have a huge amount of our revenues underpinned by some of the most successful retailers in the country.

Tenant demand is strong. Our vacancy rates are some of the lowest in the industry. And on top of that, we’ve got those demographic changes that we talked about and they’re really underpinning demand in our markets. So, while newcomers coming into the country may not go into these markets and go straight and buy a new outfit at an enclosed mall – they might not – but they’ll definitely go and buy groceries at a Skyline shopping center.

[00:09:52] Ray Punn:

Well, thanks, Gordon Craig, for joining me today. And again, congratulations on your appointment, Craig.

[00:09:57] Craig Leslie: