Partners Real Estate Investment Trust (PAR.UN-T) has faced a couple of challenging years with corporate issues and restructuring, but president and chief executive officer Jane Domenico seems confident it’s turned the corner.

“Our focus has been on growth in our net operating income and occupancy, even if we haven’t been able to have an accretive acquisition,” she said.

“We still have growth opportunities through development and redevelopment within our existing portfolio as well as occupancy improvements. I think we’re in a very stable place and in a good position to meet the day-to-day needs of our assets.”

Partners’ last transaction was the sale of three Ontario buildings leased to Canadian Tire to CT REIT (CRT.UN-T) in September 2014. Part of the reason for the lack of activity, according to Domenico, was Partners was under strategic review until last May. 

Now, however, she said the REIT is looking for “the right asset at the right price” and opportunities to acquire and redevelop properties consistent with its business plan and its capital requirements.

A tumultuous past

Partners REIT started out as Charter REIT in 2007 and grew to own about 10 mid-sized shopping centres in Ontario and Quebec by 2010. At that time, a 33 per cent stake was purchased by League Assets Corporation, which then changed the REIT’s name.

League Assets and the Partners REIT board proceeded to lock horns over governance issues as well as management and control of its assets. League Assets became insolvent and Partners REIT initiated steps to re-establish its independence in 2012.

After shaking off the League debacle, Partners faced further controversy when in May 2014 Orange Capital LLC, a significant unitholder, challenged the legitimacy of a property transaction. Partners was forced to back out of the deal and board members resigned (Financial Post, May 5, 2014).  

A strategic review and executive changes ensued, including the appointment of Domenico as the REIT’s chief operating officer in May 2014 and subsequently its CEO.

Increases to net operating income

Partners published its year-end financial results earlier this month and they showed same-property net operating income of $8.2 million, a two per cent increase from the fourth quarter of 2014.

“We’ve had two quarters of net operating income increases and, given the fact that we’re retail, I think that bodes well for people to understand that we’re moving forward in a positive direction as a company,” said Domenico, who stressed the small volume of trades is a challenge faced by Partners and other small-cap REITs.

Partners has a market cap of approximately $115 million. A rights offering that closed in October raised $20.6 million that went towards redeeming its $28.75 million in eight per cent convertible debentures, which are scheduled to mature at the end of March.

Partners adopted a policy last year requiring all trustees to own units in the REIT. Each non-employee trustee is required within five years to have units with an aggregate value at least equal to three times the amount of the annual board retainer.

Partners has total debt of $365 million on an asset base of $521 million. There are $163.5 million in mortgages maturing over the next two years at a weighted average contractual interest rate of 4.86 per cent. At current market rates, refinancing those mortgages would enable Partners to reduce its finance costs.

Partners has a portfolio of 36 properties in British Columbia, Alberta, Manitoba, Ontario and Quebec comprising more than 2.5 million square feet of leasable retail and mixed-used space. They’re largely located in secondary markets and generally anchored by “necessity-based retailers” such as grocery and drugstores.

Seventy-six per cent of tenants are national in scope and the five largest by leased area are Shoppers Drug Mart, Walmart, the Quebec government, Metro/Super C and Sears Canada.

Strong leasing activity

Partners completed 78 per cent of 2016 lease renewals by the end of 2015 and, excluding Cornwall Square, has an occupancy rate of 96 per cent. The fashion-oriented mall in Cornwall, Ont. reduces that number and CBRE has been mandated to look at its potential disposition.

“Fashion retail is difficult at the mid-market level and we have some challenges there and are working very hard to improve our occupancy,” said Domenico. “We’re not seeing the growth that we’ve seen historically by retailers in that niche category.”

Partners’ strategy is to derive value from the portfolio by prioritizing superior tenant client service, focused leasing activities and active asset management.

Internalizing property management

Paul Harrs was recently hired as chief operating officer, which Domenico said was instrumental to Partners’ newly announced plan to internalize the management of its 25 properties outside of Quebec through the first half of this year as a cost-saving measure.

With the exception of their finance and accounting functions, these properties have been managed by EPIC Realty Partners.

Partners will also consolidate the management of its 11 Quebec properties under the oversight of a single external property manager. Two external managers currently provide property management, leasing and some of the accounting functions. A request for proposals to take full control is underway.

“When you have a big task ahead of you, it’s better to crawl, walk and then run,” Domenico said of not internalizing management of the Quebec properties. “Given Quebec’s difference in laws and language, the make-up of our tenancies and the size of the portfolio, we feel that at this time the continuation of the external model is warranted.”

Partners is in the process of hiring additional staff, and the relocation of its head office from Barrie, Ont. to downtown Toronto should be complete by mid-April. It will include the REIT’s executive, asset management, property management, leasing and tenant legal functions.

Financial services activities will remain in Barrie.