Real estate company quarterly financial reports often give investors some insight into the short-term health and prospects. In rare cases, they provide a snapshot of a company going through big changes.
The Fredericton, N.B.-based company reported that its three-month and nine-month financials were full of one-time costs that bode to be long-term positives: higher administrative expenses, relating to the integration of recently acquired KEYreit and higher financing costs related to that acquisition, expenses from the move to the TSX and the company’s ongoing REIT conversion.
Before those charges, the retail property owner and developer produced some strong numbers: nine-month funds from operations (FFO) of $14.5 million, up 19.3 per cent from the year before. FFO was boosted by growth in total net property operating income and same-asset net property operating income and net property operating income from the acquisition of KEYreit. It had FFO of $5.6 million for the three months ended Sept. 30, an increase of 32% from the prior year.
Growth has a cost, however. Plazacorp’s came in the form of a nine-month loss of $1.7 million compared to a profit of $45.0 million recorded for the same period in the prior year.
There were several reasons for Plazacorp’s bottom line going from black to red.
First was the non-cash fair value adjustments on investment properties and investments (net of deferred taxes) as a result of the write-off of capitalized transaction costs. Also affecting costs were a smaller change in capitalization rates and one-time transaction-related costs recorded on the acquisition of KEYreit for the termination of the KEYreit asset and property management agreements, as well as severance.
Michael Zakuta, Plazacorp’s president and CEO, said the company is “pleased” with its financial results and that the KEYreit acquisition is adding to its profitability.
The highlight of Plazacorp’s busy year was the acquisition of KEYreit in May for a total of $325 million (including the assumption of debt). Publicly traded KEYreit billed itself as “Canada’s premier small-box retail property owner” with 227 properties in nine provinces across Canada.
It also has proved to be a good fit with Plazacorp’s existing portfolio. “We have seen pretty much immediate results from the acquisition,” said chief financial officer Floriana Cipollone.
She attributes the successful absorption of KEYreit to a number of factors.
“The portfolio was well-leased when we bought it – although there is a lot of opportunity for future redevelopment in the portfolio – but currently in terms of vacancy,” she said.
“Another factor is the fact that we got immediate savings and synergies from terminating the previous property management and asset management agreements. Those are coming to our bottom line right away.”
Plazacorp has also benefited from the fact the KEYreit properties are for the most part easy to manage. “It is not like we needed to hire reams of people to bring these properties on board,” she said. “They did fit very well with our existing infrastructure.”
Plazacorp’s current portfolio includes interests in 347 properties totalling approximately 6.6 million square feet across Canada and additional lands held for development. The portfolio includes a mix of strip plazas, stand-alone small-box retail outlets and enclosed shopping centres. Total assets have reached almost $1 billion.
The Plazacorp CFO did not rule out future acquisitions. “We have always had a philosophy of looking at anything and everything, one asset at a time or more assets at a time, but it has got to work for us,” she said.
“But our core business is development and redevelopment and we continue to focus on that.”
The company’s primary focus? “Can we grow our cash flow per share? At the end of the day, that is what drives us. We have a track record of increasing our dividends to shareholders and creating wealth for our shareholders, that is what drives us. If a deal doesn’t make sense and doesn’t do that for us, then we don’t do it.”
TSX and REIT
In July, Plazacorp graduated from the TSX Venture Exchange to the Toronto Stock Exchange where it trades under the symbol PLZ. That’s a positive move for the company but it is not done yet.
It is in the midst of converting to a real estate investment trust format, a lengthy process the company expects to complete by January.
“It took us just over two years to get the OK from Revenue Canada so we could start,” said Cipollone. “I think rulings do take a long time, I don’t think we are outside the norm for companies ( looking to convert into a REIT).”
Going the REIT route will confer immediate benefits to Plazacorp, she said.
“Certainly it is the preferred vehicle in Canada. It is the most understandable one. Most of the real estate industry is in REIT format. It is helpful to us, helpful to our cost of capital. I think there are real tax advantages for shareholders that distributions flow out to them directly. For all those reasons, it is the right thing to do.”