'We've been growing internally, we've been growing externally': Primaris CEO on cashflow growth

Primaris REIT Q4 Earnings Discussion – Detailed Summary

Key Concepts:

• NOI (Net Operating Income): Revenue generated from a property minus operating expenses. A key metric for evaluating profitability.
• FFO (Funds From Operations): A measure of a REIT’s cash flow, used to determine its ability to pay dividends.
• Same-Property NOI Growth: The increase in NOI from properties owned for the same period in the previous year, excluding acquisitions and dispositions.
• Occupancy Rate: The percentage of leasable space that is currently occupied by tenants.
• HBC (Hudson’s Bay Company): A major Canadian retailer that previously occupied significant space within Primaris REIT’s properties.
• REIT (Real Estate Investment Trust): A company that owns, operates, or finances income-producing real estate.
• Trophy Shopping Centers: High-quality, well-located shopping centers with strong tenant profiles.

1. Hudson’s Bay Space Repositioning & Demand

Primaris REIT currently manages 11 former Hudson’s Bay Company (HBC) spaces, totaling approximately 1.3 million square feet. Alex Avery, CEO, reports “very strong demand” for this space, attributed to limited new retail construction – specifically noting that the peak of retail space per capita in Canada was in 1991. Substantially all of the HBC space has been leased, with lease execution and finalization currently underway. The strategy for filling these spaces varies: 3-4 locations will be filled by single, large retailers; 5-6 will house a mix of one or two retailers per floor; and a smaller number will be subdivided into multiple smaller stores, tailored to the specific mall and local market needs. This customization is driven by varying demand – some malls require more small shop space, while others are attracting larger single users.

2. Toys R Us Situation & Proactive Tenant Monitoring

Primaris REIT proactively monitors tenant health through monthly sales reporting. This allowed them to anticipate the struggles of Toys R Us in Canada. At the beginning of 2023, they had six Toys R Us locations; by year-end, this number was reduced to two. However, Primaris has secured tenants for substantially all of these vacated spaces, with lease execution in progress. This demonstrates the REIT’s ability to quickly adapt to tenant turnover.

3. Q4 Financial Performance & Growth Drivers

The latest quarter saw rental revenue of $188 million. This growth is attributed to a combination of factors: strong tenant demand, successful leasing of vacant spaces, increasing rental rates, and improved recoveries (a component of lease structures in enclosed shopping centers). Key financial metrics include:

• 6.8% Same-Property NOI Growth: Indicates strong performance from existing properties.
• 9% FFO per Unit Growth: Demonstrates increased cash flow available to investors.
• Fifth Consecutive Distribution Increase: Highlights the REIT’s commitment to returning value to shareholders.
• $1.6 Billion Acquisition of Four Trophy Shopping Centers in 2025: Represents significant external growth and investment in high-quality assets.

Current occupancy is approximately 87%, with small shop space occupancy at a higher 93%. The decrease in overall occupancy is directly linked to the departure of HBC, but Avery emphasizes that HBC was a low-rent tenant, and the REIT has maintained positive cash flow growth despite the occupancy dip. He anticipates a significant boost in cash flow in late 2026/early 2027 as new tenants begin paying market rents.

4. Land Value & Strategic Development Opportunities

Primaris REIT owns substantial land holdings alongside its shopping centers – some properties have 80-100+ acres. Historically, these centers were built outside of town with inexpensive land, but subsequent urban development has significantly increased land values. The departure of HBC removed lease restrictions that previously limited land use options.

• Total Portfolio Land: Approximately 1,400 acres.
• Excess Land: Approximately 400 acres.
• 2026 Priority: Strategically evaluate and unlock value from the excess 400 acres, with some areas currently undeveloped ("big fields of grass"). This land is located across various markets throughout Canada.

5. HBC Departure – A Net Positive

Avery explicitly states that while the HBC departure initially impacted occupancy numbers, it ultimately proved beneficial. “While the occupancy number took a hit, we're still able to deliver positive cash flow growth and positive cash flow growth on a per unit basis all the way through this period because the rest of the business is booming so much.” This highlights the REIT’s resilience and the strength of its overall portfolio.

6. Quote:

“We’ve been growing internally, we’ve been growing externally, and perhaps most importantly, we’re growing on a per-unit basis. Really delivering cash flow growth for our investors.” – Alex Avery, CEO of Primaris REIT.

Synthesis/Conclusion:

Primaris REIT is demonstrating strong performance driven by proactive tenant management, a robust demand for retail space, and strategic land value realization. The repositioning of former HBC spaces is progressing well, and the REIT is capitalizing on favorable market conditions to drive NOI and FFO growth. The planned development of excess land in 2026 represents a significant opportunity to unlock further value for investors. The REIT’s ability to navigate tenant turnover, maintain positive cash flow, and pursue both internal and external growth strategies positions it favorably for continued success.