RFA Financial Targets CAD 1.5 Billion in Asset Sales, Lending Push

RFA Financial is targeting CAD 1.3 billion to CAD 1.5 billion in cumulative asset sales and CAD 8 billion to CAD 12 billion in lending assets under its three-to-five-year plan, executives said on the third-quarter earnings call. The company, formerly Artis Real Estate Investment Trust (TSE:AX.UN), merged with RFA Financial in February and has been converting property into lending ever since.

RFA Financial President and CEO Ben Rodney also set a payout ratio target below 65% over the same period. For RFA Bank, the objectives include a low-to-mid-teen return on equity and compound annual net income growth of 40% to 50%. Rodney added that the company remains in the early stages of its plan. Patience, presumably, is part of the asset base.

How far along are the property sales?

RFA closed the sale of 11 properties for CAD 110.5 million during the third quarter, CFO Jaclyn Koenig said. The company held approximately CAD 334 million of investment properties listed for sale as of September 30.

Chief Operating Officer Melody Lo detailed the quarter's transactions:

• A 10-property industrial portfolio in Winnipeg sold for CAD 76.5 million.
• An Alberta retail property sold for CAD 34 million.
• Earlier in the year, the company closed CAD 60 million of dispositions in the first quarter and CAD 94 million in the second.

After quarter end, RFA closed the sale of another industrial property for CAD 39 million. That brought closed dispositions to CAD 304 million across 27 properties and a parcel of development land, Lo said. Including closed, unconditional and conditional transactions, year-to-date disposition activity reached CAD 530 million, or roughly 40% of the three-to-five-year target.

The pricing held up. Closed sales and unconditional contracts achieved an average price 5.4% above IFRS values (the International Financial Reporting Standards carrying values on the balance sheet). Closed sales alone were 4.3% above those values, while unconditional contracts were 8% above them.

What is left in the portfolio?

Following the dispositions, the portfolio consisted of 65 commercial properties in Canada and the United States totaling approximately 7.9 million square feet, plus 395 multi-residential suites, as of September 30. Occupancy, including committed leases, stood at 84% at quarter end, Koenig said.

Leasing economics moved in the right direction. The company reported an 11.2% weighted average increase in renewal rates during the quarter, covering nearly 117,000 square feet of lease renewals that commenced in the period. RFA also signed a tenant to a 20-year lease for more than 120,000 square feet, scheduled to begin in 2028. A two-decade commitment is not a common sight in commercial real estate at present.

Is the lending business growing?

Year-to-date mortgage originations across on- and off-balance-sheet operations increased 31% from the prior year, Lo said. The company was close to surpassing its full-year origination volume from the previous year and expected to exceed that level by year-end.

Credit quality figures were similarly tidy. RFA Mortgage Corporation's arrears rate (loans with missed payments) was 0.063% in the third quarter, compared with a national average of 0.30%, Lo said. The company cautioned that some information cited on the call, including mortgage arrears rates, came from third-party sources and had not been independently verified by RFA.

At RFA Bank, actual credit losses represented 0.23% of average mortgage and loan assets on an annualized basis, Koenig said. The bank's common equity Tier 1 capital ratio (a core measure of bank capital strength) was 16.09%. Koenig also reported a net interest margin (the spread between lending income and funding costs) of 2.4%, excluding the impact of non-cash purchase price adjustments. The company noted that measures including net interest margin and average mortgage and loan assets are non-GAAP measures and may differ from those used by other issuers.

The question-and-answer session produced no analyst questions. Whether that reflected satisfaction or an early lunch was not disclosed.