Morguard Real Estate Investment Trust (MRTUN) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust 2026 Third Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 29, 2026. I would now like to turn the conference over to Andrew Tamlin, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's Third Quarter 2020 Earnings Conference Call. I am joined this afternoon by John Ginis, Vice President of Retail Asset Management; Tom Johnston, Senior VP of Western Office Asset Management; and Todd Febbo, Senior VP of Asset Management of Eastern Canada. 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 third quarter 2026 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 would make on this call. Our third quarter has produced results that have met expectations. The REIT's net operating income for the third quarter was $27.3 million, which was down from $31.3 million in 2025. The major reason for this change was a onetime property tax refund received last year relating to mostly vacant space. Our third quarter net operating income was up slightly as compared to the second quarter NOI. Our retail results continue to be steady. We have had good success in continuing to add quality retail tenants in the last 12 months throughout the portfolio and our community strip portfolio continues to produce solid same-store growth at 2.5% year-to-date and are effectively operating at 100% occupancy. Looking at the remainder of 2026, we expect our retail results to continue to remain stable. While we are working through the missing Bay income, we are still seeing positive retail fundamentals. Further, we are working on some retail developments, which I will touch on in a few minutes. Both traffic and sales per square foot numbers in our portfolio have been solid and in general, have been increasing over the last few years. Switching gears to our office results are 2 larger vacant spaces from earlier this year are key assets in Vancouver and Ottawa, represent a total of 84,000 square feet of vacancy. We believe these 2 vacancies will be short term in nature as both buildings are well located in favorable in-demand urban areas. All of our other individual office assets are seeing either similar or improved occupancy from a year ago and is consistent with the larger trend of companies imposing back to the office policies. There also continues to be solid growth in our Penn West Plaza results as we move past the initial period of 2025 inducements provided for the lease-up of this building. Penn West Plaza's NOI has increased $1.6 million to the end of the third quarter on a year-over-year basis and remains at approximately 80% occupancy. Turning to financing and liquidity. The trust has $54 million in liquidity at the end of the third quarter, which is relatively unchanged from last quarter and down slightly from $68 million at the end of 2025. The Trust also has $225 million in unencumbered assets, along with some up-financing opportunities in 2026. During 2026, the Trust has renewed 5 mortgages totaling $114 million with a slightly higher average rate upon renewal. The trust is approximately 22% of its debt is variable at the end of the quarter, which has increased slightly from 21% at the end of the year. We do expect to see an opportunity for modest additional up-financing in 2026 as we are currently in discussions with lenders about these last few upcoming mortgage renewals. In general, we have seen the lending market continue to open up in the last year with lower spreads, especially on attractive assets, along with lenders being more open to open to looking at office financing opportunities. Management is also evaluating how to address the $159 million convertible debenture maturity that will be coming up at the end of the year. We have been working with the investment bakers and have received a proposal for their full renewal. While this is being considered, management is also considering other financing options to extinguish this obligation and we'll report to the markets at the appropriate time. As mentioned in past quarters, the trust's operating capital reserve has been established to be $35 million in 2026 which is unchanged from 2025. This equates to $26,250,000 for the 9 months year-to-date. Actual cash spent for the quarter amounted to only $17.8 million. We do expect to spend close to the full amount of the reserve by the end of the year as we typically have more capital spend skewed to the back part of the year. Our overall occupancy level of 85.8% at the end of Q3 2026 has increased 100 basis points from 84.8% at March 31. The retail occupancy has increased 150 basis points, mainly coming from the enclosed malls and the office occupancy has also increased 150 basis points as well since the first quarter. We continue to expect this percentage to rise in the coming quarters as additional leasing deals get booked. We believe that the decline in industrial occupancy is temporary and will be reversing in the short term. And looking at the 610,000 and remaining square feet for retail and office tenants that is coming up for renewal in the last quarter of 2026, we feel good about the vast majority of this space. Every tenant greater than 10,000 square feet has already been renewed or will be renewing. Looking quickly at 2027 for the same tenant threshold, it is a similar story with only a couple of smaller office industrial type tenants that are at risk, none of which will be overly impactful. As mentioned in past quarters, we are now embarking on a strategic merchandising program for St. Laurent which will see the addition of some new nationally recognized brand names being added to the tenant roster, along with expansion plans for other tenants on the existing rent roll. The current development spend in the amount of approximately $10 million includes build-outs for tenants such as Sephora and H&M. These are all now open, and we have received very positive reviews about their impact. We ultimately expect to spend in the range of $25 million to $30 million as we look to add more discriminating tenants and also look to activate the former Sears space at Stl Laurent. This work will also include the demolition of the former Sears parking lot -- parking deck, which is no longer needed and has exceeded its useful life. We've completed the new Uniqlo premises, which is 12,600 square feet and is scheduled to open early in 2027. We are also pleased that the former Sears box will be retenanted and will include a new sport Chek and split fill. The Sport Chek is a relocation of an existing tenant and will be a great complement to split fill who is opening a new entertainment option at St. Laurent. This work has been done and both tenants are scheduled to open next summer or fall. The trust has also had 2 No-Frills grocery deals which have been undertaken. During the fourth quarter of 2025, and you know frills grocery store opened at Parkland Mall in Red Deer, and we are now seeing the income for that space. This cost was $1.5 million and activated previously vacant space. There is also a new frills opening at the center in Saskatoon in early 2027 with the cost of approximately $5 million. The trust believes that both of these new popular grocery options will be strong additions to these malls. The trust will also be retenanting the old PV Mark box at our open-air retail asset in Airdrie, Alberta. The new tenant will be a gym operator and will represent a combined spend of approximately $1.5 billion and will be very accretive to the income of the REIT starting in 2027. Wrapping up, we continue to believe that there are strong fundamentals in the retail leasing environment and that the office market is in full read onload. 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 steady. 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 our 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. We will now open the floor to questions.

[Operator Instructions] Your first question comes from Jonathan Kelcher of TD Cowen.

The first question, just on the St. Laurent, the $25 million to $30 million project, there maybe walk us through a little bit of -- like what's your expected time line on that? And what sort of return are you targeting on that capital?

Jonathan, John Ginis, I'll answer the question. So as Andrew noted in his remarks, so the program itself is, again, $25 million to $30 million. It was initiated in 2024. And it involves various components of them all. And by components, I mean, both former anchor boxes, but also reworking space in the mall to accommodate in a large format, users like the H&Ms of the world and Uniqlo, which we'll be opening in the spring of 2027. So again, backdating to when we started this program to when we expect to end it. The full program should come to its conclusion opening by the end of 2027, early 2028.

Okay. And then what sort of return are you targeting?

We typically don't give a lot of guidance out of both that, Jonathan. So -- it's not a simple answer because we are moving one of the tenants that we're incorporating into the Sears premises is an existing tenant as well. We can have a side bar chart on that, if you like, but we typically don't provide good guidance.

Fair enough. And then I think last quarter, when we were talking about HBC. You were hoping to be able to provide an update on at least lower level at Cambridge. Is there anything to report on that? And where does that stand?

Yes. Yes. So on that space for that shopping center, we have leased the lower level of the premises to Zellers. So it's about a 65,000 square foot footprint. They have taken occupancy and we expect them to open before the end of November and it's for a 5-year term.

Okay. And then the upper floor there like any -- like how is that going to...

The shopping center -- yes. So the shopping center is a single-level shopping center, albeit the HBC that connects to it with the 2-level premises. So the second level is not so straightforward. So right now, we're just keeping it off stream. We're still evaluating options on it, but it remains vacant as we speak.

Okay. And then just lastly for me on -- and I haven't asked this in probably a couple of years, but petroleum place with the government lease, is there anything there? Any updates there?

So believe it or not, Jonathan, there is not. That continues to be an overhaul. So it's been maybe 5 years that it's been an overhaul. But we have reached out to the government on a proactive basis on a number of times. But they're continuing to pay the overhaul rent, which is favorable in our -- which is in our favor.