With Walmart as anchor, SmartCentres pushes mixed-use growth

Renx.ca
Feb.23, 2021

While SmartCentres REIT’s large Walmart and pharmacy-anchored retail portfolio continues to provide strong recurring income, its mixed-use development program is becoming of ever-increasing importance.

The REIT has 166 properties on 3,500 acres of owned land, approximately $10.4 billion in assets and 33.8 million square feet of income-producing retail space with 97.3 per cent occupancy across Canada.

All of its retail properties contain either a Walmart or pharmacy, and 60 per cent of its tenants are considered essential, which means they remain open and operating (though sometimes with restrictions) during the pandemic.

SmartCentres (SRU-UN-T) held a Feb. 11 earnings conference call to report its Q4 and year-end results for 2020.  An accompanying media release included a summary of its activities over the past 12 months and look ahead to its plans for 2021.

“Our focus remains on operating our existing shopping centres while simultaneously creating value through real estate development,” said president and chief executive officer Peter Forde. “This development process and the value it creates takes time.”

Financials and the Walmart factor

Quarterly net income compared to a year earlier fell by 53.3 per cent, and 2020 net income of $89.9 million was down from $374.2 million in 2019 (which was heavily impacted by about $300 million in fair value adjustment property writedowns).

Annual funds from operations increased by $2.5 million to $368 million, but dipped by 1.5 per cent to $86.7 million on a quarter-to-quarter basis.

“The pandemic continued to affect the financial results through the fourth quarter, albeit to a far lesser extent than the previous two quarters,” said executive vice-president of portfolio management and investments Rudy Gobin.

“Our priority during this period of uncertainty was and continues to be protecting our employees, the communities we serve, our tenants and our business while doing everything possible to mitigate the financial implications to ensure liquidity and to continue strengthening our balance sheet.”

A major contributor to that is Walmart (WMT-N), which anchors 75 per cent of the REIT’s retail properties and represents 25 per cent of SmartCentres’ rental income.

“Walmart plans to spend $3.5 billion over the next five years to make the online and in-store shopping experience simpler, faster and more convenient,” said Gobin. “This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centres.”

Intensification and growth

In its financial results, Forde noted Walmart stores “have performed extremely well and have continued to drive high traffic levels to our open-format centres.”

The strength of that relationship continues to provide growth opportunities for SmartCentres.

At its massive Vaughan Metropolitan Centre development just north of Toronto, a new 140,000-square-foot Walmart opened in October, allowing for the closing of an older store on the SmartVMC site.

This freed up approximately 15.5 acres of land for mixed-use development close to the TTC subway station at the property.

The new store features a Canadian first, a 10,000-square-foot e-commerce fulfillment centre and a drive-through pick-up facility. It’s expected to fulfill as many as eight times the online orders of an average Walmart store.

Not all the opportunities are huge.

Some, such as a newly announced development in Alliston, north of the GTA, are smaller infill opportunities. SmartCentres plans a phased multifamily development at its 37-acre, Walmart-anchored Alliston Shopping Centre.

The first project will be a three-storey, 42-unit apartment complex.

Liquidity, retail operations and performance

SmartCentres’ liquidity exceeded $1.5 billion at the end of 2020.

“Our core competency and land development makes us very comfortable in driving profitability through intensifying and repositioning many of our strategically located properties, almost all of which we know very well because we develop them in the first place,” said Forde.

“These great shopping centres, with a strong tenant base and covenant, with their outstanding access on or near highways and transit, and, most importantly, in the midst of growing populations, provide a solid foundation to the development of higher and better residential and other uses.”

Gobin said the retail portfolio remains focused on essential services and value-oriented retailers, not fashion, recreational or entertainment tenants. Non-essential, small independent retailers represent approximately six per cent of SmartCentres’ contracted rent.

SmartCentres continues to work with each retail tenant to establish, where appropriate, mutually satisfactory arrangements for some relief of rental obligations.

“Our attention was and remains on assisting our retailers in getting back to opening their stores and operating at full capacity once the lockdowns are lifted, which is just now starting to take place for many tenants,” said Forde.

“In addition, we have offered our centres to all levels of government and public health authorities to play a role in reducing the impact of the pandemic.”

Virtually all of SmartCentres’ retail sites are open-format outdoor centres, enabling customers to practice physical distancing and feel more comfortable and safe than in enclosed malls.

“The top regional malls are going to be doing very well once we get out of the pandemic,” said Forde. “But I think the medium to smaller malls in smaller communities are likely going to continue to struggle as they were before the pandemic.”

SmartVMC mixed-use development

Occupancy of 1,100 residential units at the 55-storey Transit City 1 and Transit City 2 condominium towers at the SmartVMC development, developed in partnership with CentreCourt, is complete.

The 1,098-unit, multi-level facility providing parking for both buildings and the neighbouring PwC/YMCA mixed-use facility is fully functional.

Construction of the 55-storey Transit City 3 condo, with 631 units, is ahead of schedule and budget. Closings are expected to start this spring.

“For the three towers combined, we’re not only meeting but expect to exceed our original plan for profit by more than $35 million,” said executive chairman Mitchell Goldhar.

Construction is well underway on the 45-storey Transit City 4 and 50-storey Transit City 5 condos that have a combined 1,026 sold units. Construction has also started on a 35-storey, 454-unit purpose-built residential rental building at SmartVMC.

All 22 townhomes that are part of the Transit City 1 and Transit City 2 project are pre-sold. Delivery of the units is expected late this year.

SmartCentres is preparing for the launch of the next phase of high-rise development at SmartVMC.

Other SmartCentres developments

A 171-unit purpose-built rental apartment in Laval, Que. is complete and approximately 80 per cent leased. Construction of the next phase is expected to start soon.

SmartCentres completed construction of its first three SmartStop self-storage facilities in Toronto, Brampton and Vaughan, and reports occupancy levels ahead of expectations. Two additional SmartStops in Oshawa and Scarborough are under construction and expected to be completed this year.

The REIT is in the process of obtaining municipal approvals for more SmartStop locations in Aurora, Whitby, Markham and Brampton.

SmartCentres expects to start construction of a new Ottawa seniors residence with two buildings early this year along with joint venture partner Groupe Sélection.

“With our partners. we are developing seniors apartments with extra amenities and unlimited levels of residential care, all tailored to seniors: six with Revera and two with Groupe Sélection,” said Goldhar. “All of these projects are in the municipal approval stage.”

The redevelopment of a 73-acre Cambridge, Ont. retail property with more than 12 million square feet of residential, retail, office, institutional and commercial uses has commenced.

“During the course of the last year, we stayed on the offensive, even accelerating the processes of obtaining rezonings and site plan approvals,” said Goldhar.

SmartCentres has identified 284 projects for its mixed-use development pipeline, the majority of which will provide recurring income.

These include more major developments in Vaughan as well as projects in: Pickering, Oakville, Toronto, Barrie, Scarborough