First Capital Real Estate Investment Trust (CHPUN) Earnings Call Transcript

Mr. Chairman, I second the motion.

Thank you. The online portal remains open for voting. Once closed, the scrutineers will tabulate the votes cast, and we will report on the results towards the end of the meeting. The next item of business is to consider and approve the unitholder rights plan agreement set forth in Schedule B to the circular, as amended by notice filed on SEDAR on September 14. The text of the proposed resolution approving the unitholder rights plan agreement is attached as Schedule A to the circular. Alison, were there any questions or comments on the unitholder rights plan?

No, we have not received any questions or comments related to this item.

May I have a motion to approve the unitholder rights plan?

Mr. Chairman, I move that the resolution to approve the unitholder rights plan agreement, in the form attached as Schedule A to the circular, be approved.

Mr. Chairman, I second the motion.

Thank you. As this is the last item of business, the online portal will remain open for voting for a few more moments. [Voting]

This brings us to the end of voting on items of business before this meeting, and I, therefore, declare the polls closed. Thank you for casting your votes. The scrutineers will tabulate the votes cast, and we will report back on the results momentarily. Following this formal portion of the meeting, there will be a presentation from management concerning the REIT's strategy and operations. We would remind you that if you wish to submit a question through the online portal, that you do so before the end of management's presentation, so that it may be addressed in the Q&A period that will follow. I am now pleased to report we have now received the preliminary voting results from the scrutineers on the 4 items of business. The formal voting results will be made available on SEDAR following the meeting. On the election of trustees, the voting results show that each trustee nominee has received votes in favor from a range of at least 88% to 99% of the votes cast. Accordingly, I declare that the proposed trustee nominees have been duly elected as trustees of First Capital REIT to hold office until the next AGM of unitholders or until they resign, or their successors are duly elected or appointed. On the election of auditors, the voting results show that approximately 99% of votes cast were in favor of the reappointment of Ernst & Young LLP as auditors of First Capital REIT. I declare that Ernst & Young LLP are reappointed auditors of First Capital REIT and that the trustees are authorized to fix the auditors' remuneration. On the advisory vote on First Capital's approach to executive compensation, approximately 73% of the votes cast were in favor of First Capital's approach to executive compensation. The motion is carried, and the resolution is approved. On the vote to adopt the unitholder rights plan agreement, approximately 92% of the votes cast were voted in favor of adopting the plan. The motion is carried and the resolution is approved. As we have now come to the end of the formal portion of the meeting, we will terminate the meeting now. May I have a motion to terminate the meeting?

Mr. Chairman, I move that the meeting terminate.

Mr. Chairman, I second the motion.

Thank you. I declare the meeting terminated. I will now turn things over to Adam.

Thank you, Bernie. Good morning, fellow unitholders, and thank you for joining us today. We look forward to the day when we can meet in person at one of our Super-Urban properties, as we've done over the last number of years. Today, we're meeting virtually due to the COVID-19 pandemic. Typically, our format for this presentation would include a comprehensive review of 2019. Given how much has changed since then, our review of 2019 will be concentrated on our strategic progress and achievements as these are more relevant than ever. The short-term environment brought upon by the pandemic has been very dynamic. Accordingly, we'll provide a current business update. Following that, Jordie Robins will discuss our development program, which includes our density pipeline. And following Jordie, Michele Walkau will discuss our very important ESG initiatives. So let's start with our strategy. We made tremendous progress advancing all of our strategic initiatives in 2019. We launched our Super-Urban real estate strategy which outlined evolved investment criteria and key performance metrics to monitor our progress. It also led to a repositioning of our portfolio. The aggregate impact of our investment activity since the beginning of 2019 has resulted in a $1.6 billion shift towards our Super-Urban objectives which dramatically improved the quality of our portfolio. It included $645 million of new investments, primarily through development, entirely in Super-Urban neighborhoods with over 90% being in Toronto, such as Liberty Village and Yorkville. We also disposed of $1 billion of our leased urban properties, resulting in us exiting entire markets such as Windsor, Red Deer, Trois-Rivieres and Québec City, among others. We now have next to no exposure to secondary markets. The progress we made in 2019 can be seen in our key Super-Urban metrics. Coming into the year, we were already the North American leader amongst our peers in terms of the population surrounding our properties. We further extended that gap during the year as the average population density within 5 kilometers of our properties increased by 16% to 290,000 people at year-end. It further increased in 2020 to 294,000 people, and we are confident that we will achieve our goal of 300,000 people during 2021. Transit connectivity is a key pillar of our real estate strategy. Over 99% of our portfolio is now within a 5-minute walk of public transit. Our properties have an average walkability score of 78 which means most errands can be completed on foot. And as a testament to the soundness of our Super-Urban strategy, our average rental rate, which was already the highest amongst our Canadian peer group, increased by a record 5% during 2019 to $21.25 per square foot. We also made progress on our goal to surface value and to expand our incremental density pipeline. During the year, we submitted over 9 million square feet of zoning submissions, of which 6.5 million square feet are in Toronto. Our density pipeline grew and now sits at 25 million square feet, representing 125% of our built portfolio. We became a widely held company and eliminated the uncertainty in our ownership structure during 2019. This eliminated the overhang created by our previous ownership structure and will benefit our unitholders in the years to come and as the recovery from the pandemic continues. We successfully completed our conversion from a corporation to a REIT this past December. This has given us access to REIT-dedicated capital pools and allowed us to be included in REIT indices including the S&P/TSX Capped REIT Index, which represents incremental capital that we did not previously have access to. It was also the appropriate time to roll out our new brand identity that depicts the importance of community at the center of our strategy and solidifies our purpose to create thriving urban neighborhoods. 2019 seems like a distant memory, given all that has transpired, but it was a very important year for the advancement of our strategic objectives. I am extremely proud of the progress we made and the hard work the team has put in to focus on our strategy and to set the organization up for the future. As the recovery continues and we slowly return to normal, these efforts will propel our growth as they have enhanced our long-term trajectory. To be clear, we have reviewed our Super-Urban strategy in the context of the pandemic and beyond. We continue to believe these neighborhoods continue to represent the best prospects for growth and have the key elements that will continue to make them the most desirable neighborhoods as we look ahead. But we aren't back to normal yet. Many have recently been focused on short-term metrics, such as rent collection in a given month, which has been decent and improving. However, analyzing short-term metrics during a pandemic does not indicate the long-term quality of our real estate portfolio and little, if anything, can be taken from these numbers to assess the value of FCR. Long-term real estate fundamentals, together with asset quality do though. Leasing is a critical part of real estate fundamentals, and we have been busy this year, including through the pandemic. Combining great real estate with necessity-based tenancies has allowed us to maintain high occupancy and avoid more vacancy on a relative basis to the general retail industry. As of today, throughout the 6-month COVID period, we have had a total of 174,000 square feet unexpectedly come back to us, most of which was offset by new tenant openings. This is a very low number in the context of our 23 million square foot portfolio. Throughout the pandemic, we have been at the forefront of supporting our tenants in need. In March, right at the onset of government-imposed closures, we launched our small business support program to provide immediate rental relief to our small business tenants. Subsequently, the government launched CECRA, which has largely replaced this program. CECRA targets small and medium-sized businesses most impacted by the pandemic. We have fully participated for all qualifying tenants in our portfolio. This is a very important investment in our tenant base, owing to very unusual circumstances. A vast majority of these tenants are healthy businesses and were forced to close or operate at significantly reduced capacity and simply need a bridge to the other side, which CECRA provides. But this pandemic has also impacted large retailers, not covered by CECRA, including some very large ones. Our approach with these larger tenants was case-by-case. Generally, where we provided a concession, especially if any abatement of rent was involved, we achieved other valuable lease amendments in FCR's favor. These could be an extension of term in space that we desired one or more importantly, valuable redevelopment rates secured by FCR at a number of prime Super-Urban properties. These benefits are meaningful and will contribute to additional growth and value from our portfolio. The pandemic has negatively impacted investor sentiment of our asset class. This has led to a large disconnect between First Capital's business performance and our unit price. Based on what we're seeing, it certainly appears that the worst of COVID's impact is now behind us. There are 2 primary costs of COVID-19. The first is our bad debt expense. Year-to-date, we have taken a total of $17 million of bad debt. This was entirely in Q2, which should be the largest quarterly charge we take. The second component is a reduction of property IFRS values. We have been very conservative on this as well. Our total year-to-date charge is $168 million. We were very proactive in Q1 with $119 million reduction, which declined materially as business conditions improved by the end of the second quarter. So year-to-date, a total of $185 million from COVID, which we believe includes the most challenging period. Comparing that number to the over $1.5 billion decline in our equity value highlights the current disconnect and the opportunity as we close this gap. In summary, things look and feel much better than they did a few months ago when the pandemic was first starting. Our tenants are now all open and doing increasingly higher sales volumes. They're also much better positioned to adapt and operate in a COVID world. Our development properties have also resumed with no material impact. Our density pipeline continues to be advanced through the entitlement process. Our disposition program has also resumed, and our leasing team has been very active. It's been a very busy period for our team, supporting our tenants and managing through the pandemic. In a time of crisis, one's true character is exposed. And I am exceptionally proud of who we are as a company, as demonstrated over the last few months. Thank you again for joining us today. I will now turn things over to Jordie.

Thank you, Adam. One of the primary goals of our Super-Urban strategy is to invest and create meaningful positions in high-growth neighborhoods across the country. With scale, we can invest in these great neighborhoods and help curate the design and the tenant mix in order to make them even better. For this strategy to be successful, we're focused on growing our positions in these neighborhoods by unlocking the underlying value of our related 25 million square foot density pipeline. So this morning, in addition to updating you on the progress we're making, we will share our rationale for this strategy and explain why today, assembling these large positions is more important than ever. As Adam has discussed, we continue to advance the population and transit metrics of our Super-Urban strategy. By the end of 2021, we will have submitted for entitlements for over 16 million square feet of space. This represents 64% of our incremental density pipeline. But our Super-Urban strategy is more than just metrics. We don't arbitrarily entitle and develop assets simply because there exists an opportunity to do so. Our goal is to help build inclusive, healthy and sustainable neighborhoods as great neighborhoods are defined strictly by metrics, and they don't happen by accident. It is the qualitative attributes that truly characterize a great neighborhood. They are situated within dynamic cities. They feature a mix of uses, and they possess unique identities, often driven by curated merchandising and design. While our strategy is long term, our belief today, as it was pre-COVID, is in density done right, not density at any cost. We specifically look beyond asset class and focus on creating complete and vibrant neighborhoods with a mix of symbiotic uses and thoughtfully designed buildings. Our concentrated ownership of properties in these high-growth neighborhoods allows us to take advantage of scale and design neighborhoods with significant public realm to help promote the physical and mental well-being of our constituents. You needn't look further than Liberty Village to see the inspiration for our Super-Urban strategy. The growth of our ownership position there highlights how an investment in a single but strategic property can help shape the direction and development of a neighborhood. In 2004, FCR purchased a newly developed 200,000 square foot unenclosed shopping center located in the converted industrial zone in Toronto for $19 million. At the time, the population within 1 kilometer of Liberty Village was only 11,500 people and the employment base had all but disappeared as Downtown Toronto began to gentrify and move West and Liberty Village began to grow. In 2020, and the population within a 1-kilometer radius of Liberty Village has quadrupled to over 40,000 people, and our initial purchase has manifested into a $675 million investment. Today, we own over 700,000 square feet of leasable space spread out over 14 acres. That's coverage of only 1.3x. With that in mind, and the approved King Liberty SmartTrack station, you can appreciate that we are just getting started with our intensification plans for the neighborhood. We have already submitted an application for 125,000 square foot future expansion of our head office building at 85 Hanna, and later this year, we'll submit for further intensification of the underutilized surface parking lot that abuts our office. This past year, we largely completed our King High Line development situated in Liberty Village. Over 300 of the 500 residential units are leased with average rents of $4 per square foot. The 130,000 square feet of retail space, anchored by a Longos, a Canadian Tire, a Shoppers Drug Mart and a PetSmart is 100% occupied and open and performing well above forecast. On screen is an image of our holdings in Liberty Village. Last year, we submitted a rezoning application for 1071 King Street, which will be our second purpose-built residential rental apartment project in Liberty Village. This past month, we received community council approval and expect that we will have all required approvals during the second half of 2021. The 190,000 square foot project will house approximately 200 new rental units. The proposed flatiron building design adds interest and its scale fits appropriately into the surrounding context. From our experience with King High Line, tenants value and will pay a premium for the benefits of living, shopping and working in an authentic and complete neighborhood. So we expect strong demand for this new residential building as well. Our concentrated ownership of properties also allows us to create substantive public space that is only feasible with the benefit of scale. The enlarged public realm space that we can create serves to further enhance the neighborhoods in which we've invested. The proposed elevated multiuse path that we are developing in Liberty Village called the King High Line demonstrates what can be achieved when investing holistically in a neighborhood as opposed to focusing only on one building. The King High Line will create an incredible urban experience for the residents and the tenants of Liberty Village. This path will link Toronto's West End and Liberty Village with a new linear park that spans King Street West along the existing rail viaduct. The King High Line will also serve to expand the trade area for local retailers by conveniently connecting them with a rapidly expanding population base on both sides of the tracks. Leaside in Central Toronto is another neighborhood in which we've taken a meaningful position. Our efforts and success are consistent with our Super-Urban strategy. In this case, the surrounding single-family residential area was already well established prior to the initiation of our retail development. Today, the Leaside community consists of over 70,000 family households and maintains an average household income within a 3- kilometer radius of over $154,000 per year. The Leaside Village center is 120,000 square foot geothermal, open air center, anchored by a Longos supermarket, a beer store and a mix of small shops. The building that houses Longos supermarket is a registered Ontario heritage site, built in 1919 as a locomotive facility for the Canadian Northern Railways. The integration of this historic building into the shopping center was the inspiration for the design aesthetic for the balance of the center and is fundamental to its broad neighborhood appeal. We have created an opportunity to expand our position in this site. We purchased a contiguous 2.5-acre parcel of land that was designated industrial. We subsequently rezoned these lands to enlarge our existing center. This year, we began construction of a 70,000 square foot expansion, anchored by a 13,000 square foot Shoppers Drug Mart, a 25,000 square foot PetSmart and a 15,000 square foot medical clinic. All 3 of these tenants were drawn to this opportunity based on the strong demographic fundamentals of the neighborhood, the unique design of the center and its proven track record. In addition to being adjacent, by incorporating these lands, it provides our expanded retail center, frontage and access from 3 public streets. This will improve access and traffic flow, which will serve to further enhance the center's functionality and neighborhood appeal. Unlocking value as part of our Super-Urban strategy takes many forms. Having scale in a neighborhood also provides us flexibility to reposition retail centers when required. As like great neighborhoods, great retail is ever evolving. Cedarbrae center is a 475,000 square foot property that sits on 28 acres. It is located in Toronto with the Southwest corner of Markham Road and Lawrence in a neighborhood that is undergoing change. The center is anchored by a No Frills and a Canadian Tire. Walmart vacated the center in 2019, and we've since backfilled the 100,000 square foot space with temporary tenants while we orchestrate our long-term re-merchandising plan. Consistent with our strategy, located within 100 meters of Cedarbrae, we also own 3434 Lawrence and 629 Markham Road at the Northeast Corner of Markham and Eglinton. A transformation of this part of Toronto began a number of years ago with several new condominium towers being developed and sold at Ellesmere just north of the retail centers we own. With this in mind, we created a plan to intensify and reposition our assets in this node. We are in the midst of finalizing negotiations with the 5 existing tenants at our 3434 Lawrence property, to relocate them into the former Walmart across the road. Upon completion of the contemplated relocations, the former Walmart premises will be fully occupied by long-term tenants, paying market rents which are much higher than the low single-digit rent Walmart was paying. This plan will improve the center and meaningfully increase its value. What's more, by freeing up 3434 Lawrence, we will remove all of the related encumbrances from this 3-acre property with existing residential permissions. We will unlock this property situated in a growing neighborhood where we've established a large position and secure the opportunity to redevelop it as residential. To extract the underlying value of our density pipeline, we spend much of our time and effort focused on our existing portfolio. However, taking a meaningful position in a neighborhood often begins with just 1 property. So we remain opportunistic, and we look to invest in new, underdeveloped, high-growth neighborhoods that are transit adjacent. An example of this initiative is our 385,000 square foot Dundas and Aukland mixed-use project currently under construction that sits adjacent to the Kipling TTC and GO stations. Another is our 2.1-acre Yonge and Roselawn property adjacent to the Yonge and Eglinton TTC and LRT station, where we've submitted an application for 598,000 square foot mixed-use project. We have purchased the property, and we've expanded our position in a number of great neighborhoods across Canada. However, it is rare for us or any developer for that matter, to have the opportunity to plan and build a neighborhood from the ground up. 2150 Lake Shore commonly referred to as Christie Cookie is a once-in-a-generation opportunity to do just that. 2150 Lake Shore is a 28-acre master plan development site that we own located in South Etobicoke, just 10 kilometers west of Downtown Toronto. Today, the surrounding neighborhood is deficient in adequate transit infrastructure. It lacks meaningful retail and service commercial users to service the neighborhood's 12,000 existing residents. In keeping with our Super-Urban strategy, our master plan for 2150 Lake Shore aims to resolve these issues and redefine this fledgling neighborhood. We will develop new retail and office uses, along with complementary residential uses. We will also improve existing transportation infrastructure, including the addition of a METROLINX GO station. Most notably, over 25% of the total site area will be dedicated to public space. That equates to new park space equivalent in size to 5 football fields. Since our purchase of the property in 2016, our development team have worked tirelessly with the community, the local counselor and city staff to resolve the outstanding issues to advance the entitlements for the property. As a result of this effort, I'm pleased to advise that this past May, we submitted a combined zoning bylaw amendment and draft plan of subdivision for the property. Our application contemplates over 7 million square feet of residential and commercial density. Work is now underway to finalize the approvals for the new METROLINX GO station. 2150 Lake Shore is a development proposal that will be transformational for the City of Toronto. Given its scale, the opportunity to develop this community will also be transformational for First Capital. Unconstrained, we will apply the best of everything we've learned to date to create a new Super-Urban neighborhood unlike any other. We know today, more than ever, people want to live and work in healthy, sustainable and authentic neighborhoods. So controlling these large positions is no more important than ever before. As with scale, we can help to positively impact these great neighborhoods and make them even better. We can curate the merchandising mix and design, which can help shape a neighborhood's identity. Even more important, we can create and program meaningful public realm, which will serve to promote mental and physical well-being. As we entitle our 25 million square foot development pipeline and expand our position in these neighborhoods, we will improve our net asset value and the neighborhoods in which we've invested. I will now turn things over to Michele.

Thanks, Jordie. At First Capital, we have a long history of sustainability, social responsibility and strong governance. We aspire to uphold our position as an industry leader in ESG practices. From a real estate perspective, our goal is to meet the demand for more sustainable, resilient and smart buildings for tenants and residents. At our existing properties, we strive for operational excellence. And thanks to the continued efforts of our sustainability, property and asset teams, we have reduced our absolute greenhouse gas emissions by 10% over the past 4 years ending in 2019. 12.8 million square feet of our portfolio has received BOMA BEST certifications, recognizing excellence in environmental management. And 4 new construction projects achieved LEED certification, bringing our total LEED-certified properties to over 3.7 million square feet. From a people and social perspective, we foster a vibrant corporate culture that ensures equal opportunity and well-being for all employees. Embedded in our culture is a commitment to advancing diversity and inclusion across our organization. This year, we were recognized by The Globe and Mail as one of Greater Toronto's top 100 employers, acknowledging our best practices in the workplace. And in the spring of this year, we were honored to be listed in the Report on Business Magazine in a new benchmark called Women Lead Here, a designation recognizing strong gender diversity metrics at the senior levels. At First Capital, over 63% of our executive leadership team is female, and 54% of our people managers are female. Building on our gender diversity, we recently announced our equity diversity and inclusion council. A cross-functional team of employees that will co-create company-wide initiatives to further enhance inclusion in our culture and develop the diverse talent in our organization. And we are also proud to have signed the BlackNorth Initiative CEO pledge to end anti-black and systemic racism in Canada. From a governance perspective, our strength in ESG standards and disclosure was validated through numerous ratings, including achieving a AAA rating, the highest possible in the Morgan Stanley Capital International ESG Ratings assessment for the past 3 years as well as achieving high ESG quality scores from International Shareholder Services (sic) [ Institutional Shareholder Services ]. ESG is a continual process of improvement that takes a long-term view, and we look ahead to making even more lasting change through our new 5-year ESG road map that we will launch later this year. As an organization, committing to building thriving urban neighborhoods, First Capital has been a leader in supporting the communities where we operate through our public art program and our charitable giving. For the last 12 years, we have been supporting local artists and investing in the neighborhoods we serve. We host public art competitions and partner with renowned art institutions across the country. These public art pieces add aesthetic appeal and become gathering places for our communities. Our values guide our actions. Over the past 6 months, during the pandemic, we showed our gratitude and thanks for the tireless efforts of frontline and community service workers by delivering over 1,600 delicious and nutritious meals to these modern-day heroes. We engaged our restaurant tenants in the process to prepare and deliver these meals on our behalf in order to support their operations. This was a win-win. As noted, First Capital and our employees have a long history of volunteering and giving back to the local communities in which we live and work. However, until now, we did not have an overarching program to bring these initiatives together under one banner for a larger impact. After a lot of work by many, many FCR team members, we've established a new charitable foundation called the FCR Thriving Neighborhoods Foundation. Aligned with our purpose and our brand, with people and community at the center of our business, the foundation's mandate is to support charitable initiatives that are making an impact in our neighborhoods where we operate. The foundation is a natural complement to First Capital's business as we continue to make long-term sustainable commitment to the communities we serve to generate and enhance value for all of our stakeholders. Even more, as an employee-led registered charity, the foundation empowers FCR employees to work together as one team with one purpose, to engage in a common goal of helping neighborhoods thrive. We look forward to updating you further in due course. And that concludes our presentation. We will now be open for questions.

Okay. It's Adam again. Thank you very much. For the first time that I can remember, we did not receive any questions today. So that concludes our 2020 Annual and Special Meeting of Unitholders. We'd like to thank everyone for taking the time to join us today, and we look forward to seeing you all in person at some point that we hope is soon. But until then, we wish you all the best, and thank you very much for attending. Good day.