Transcripts

BTB Real Estate Investment Trust (BTBIF) Q1 2023 Earnings Call Transcript

Operator

Good morning. My name is Julie, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust 2023 First Quarter Results Conference Call for which management will discuss the quarter ended March 31st, 2023. All lines have been placed on mute to prevent any background noise.

Should you wish to follow the presentation in greater detail, management has made a presentation available on BTB’s website at www.btbreit.com, Investor Relations Quarterly and Annual Meeting Presentations. After the speakers’ remarks, there will be a question-and-answer period, reserved exclusively for analysts. [Operator Instructions]

Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve numerous factors and assumptions and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections, and other forward-looking statements will not be achieved.

Several important factors could cause BTB Real Estate Investment Trust’s actual results to differ materially from the expectations expressed or implied by such forward-looking statements.

These risks, uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust’s management discussion and analysis and in its annual information form, which are filed on SEDAR and on BTB’s website at www.btbreit.com. I would like to remind everyone that this conference call is being recorded.

Thank you. I will now turn the conference over to Michel Léonard, President and Chief Executive Officer; and Mr. Mathieu Bolté, Executive Vice President, Chief Operating and Financial Officer.

Mr. Léonard, you may begin your conference.

Michel Léonard

Thank you, and good morning. Our portfolio at a glimpse right now stands at 6 million square feet, 74 properties and the IFRS value north of $1.2 billion. During the first quarter, we concluded an acquisition of a property located in Mirabel, Quebec adjacent to the airport — the cargo airport serving the Greater Montreal area, where the primary tenant or the only tenant is Lion Electric, the manufacturer of buses and trucks that are electric. The transaction was concluded at a cap rate that was north of 7%. So, it’s a highly accretive transaction for BTB.

We continue our diversification — densification efforts given the fact that we do have zoning changes in effect for certain properties where we’re going to be able to glean additional revenues from the densification.

Our investment activity were focused on industrial properties, and we’ve demonstrated recently, again, with an acquisition of an industrial property located in Edmonton, where the proceeds were partly paid using BTB units as an equity for the transaction.

We do have a good pipeline of properties that we can buy in the industrial segment. And we do have properties — office properties on the market at this time in order to redeploy the capital in the Industrial segment.

So, if we look at the evolution of our portfolio, the industrial properties used to be at 18% of our portfolio, and now they stand at 31.5%, almost double the size of the industrial portfolio for the last two years.

And when we look at our office segment, which is, again, I remind everybody that we’re — we don’t — we have not invested in the downtown core sector. We used to be at 54.7%, and now we are — we stand at 47.7% and still divesting off office properties.

Whereas in the necessity-based retail, we used to be at Q1 2021, I’m referring to, at 27%, and now we’re down to 20%. So, we almost doubled our size in the industrial segment and are continuing our concentration in the acquisition of industrial property. And as we can see, the office segment went down 7%, and the necessity-based retail went down 7% as well.

The office dispositions is continuing. We have a few properties on the market, and we are able to seek buyers for these properties, and we’re confident that we are going to sell these properties above IFRS NAV value for the — sorry, IFRS valuation for these properties.

As far as our occupancy rate is concerned, we’re seeing an occupancy rate that is very stable. And regarding the industrial segment, we stand at 100%. And in the next quarter, we know that there’s going to be the departure of one tenant that is going to affect — it’s 55,000 square feet in Edmonton, and that is going to affect our performance or the 100% performance on that segment.

So, if we look at the real estate portfolio and our geographical diversification. So, now 15% of our properties are located in Quebec City; 54% in Montreal; Ottawa, 15%; Saskatoon, 5%; and Edmonton, 11%. So, generally, we’re seeing a reduction of ownership in the province of Quebec in favor of Western Canada.

So, when we look at our key metrics regarding our occupancy rate, as I mentioned, we’re very stable at 93.2%. And we were successful, including — concluding in the first quarter renewals and new leases representing 125,000 square feet.

And as far as subsequent events are concerned, as I mentioned earlier, we acquired an industrial property for a little bit more than $7 million in May of 2023 located at 8810 48 Avenue in Edmonton. And as I mentioned earlier, we paid the equity part — portion of the purchase price was paid with units of BTB at $4.50 per unit.

Again, regarding our leasing and renewal activity, we concluded 67,000 square feet of new leases. And in the industrial segment, we concluded — we didn’t see an increase in revenues as a result of the fact that no lease came to maturity.

In the office segment, we saw an increase of 4.2% and in the retail 38.9%. So, it’s also important to note that in the retail, we do have leases that are below market and the correction on the retail of almost 40% was basically generated by the renewal of one lease that was way below market.

So, as far as the total of 125,000 square feet of new leases and lease renewals, what’s important to note that 67,000 square feet of new leases were in our suburban office segment.

In the retail, we finally have a firm deal with Giant Tiger. Happy to report because we have discussed this many occasions on conference calls, but this one is concluded. It’s finally under construction.

We finally received all the programs that were necessary in order to see, and we believe that we’re going to give the keys to Giant Tiger in July of this year. As far as the — the retail is concerned.

We also saw that there was a retail — a temporary retail tenant that we knew were going to leave during the quarter and effectively left because there was a temporary transaction that was concluded with Mobilia.

With this, I’d like to ask Mathieu to take you through the financial highlights of the first quarter 2023.

Mathieu Bolté

Thank you, Michel and good morning everyone. Just to start with the Lion Electric acquisition for the battery plant. It happened on February 2nd, so it’s important to say that it’s already accretive in the first quarter.

The equity portion of that transaction has been financed through the line of credit and will be replaced over time with our ongoing capital recycling initiatives that Michel mentioned.

We’re also pleased with the continuing good performance of the up downtown core office portfolio with good demand on the leasing front and average overall of 4.2% increase in the average renewal rate. The necessity-based retail segment also continues to show a good performance as most of the properties are incurred by necessity-based tenants. The occupancy rate of this segment stood at 95.9%, so it’s an increase of almost 1% compared to the same period last year.

Overall, BTB’s rental revenue increased by 13.2%. Just to note that the trust recorded a non-cash adjustment related to a change in accounting estimate for a gross lease, impacting positively the revenues by $1.4 million.

Net operating income increased by 17.1% compared to the first quarter 2022. Just to say with the adjustment that I just mentioned, so if we were to exclude this non-cash adjustment, the NOI would have increased by 8.5%. Same-property NOI showed a stable figure year-over-year.

Recurring FFO stood at $0.117 per unit for the quarter compared to $0.107 per unit for the same period 2022. So, it’s an increase of $0.01 per unit.

The payout — the AFFO payout was 72.4% for the quarter compared to 76.8% for the quarter. So, it’s a slight decrease by about 4%.

Looking at the capital structure as of the first quarter of this year, the weighted average mortgage interest rate was 4.2% compared to 3.54% for the same period last year, so it’s an increase of 66 basis points. So this increase is mainly due to the increase in the average rate of variable interest on mortgage loans outstanding, which increased by 373 basis points to 6.83%.

So, in comparison, the weighted average for fixed interest rate increased only by 17 basis points to an average of 3.78%. So here, I think what’s important to say is — although there’s an increase in the variable mortgages, we only have $37 million. So most of our mortgage book is fixed rate.

Trust concluded the quarter with a total debt ratio of 59.1%. So, it’s 120 basis points lower than a year ago. And for the refinancing commitment for this year, we have $68 million to refinance related to six loans. So, it’s five office properties and one industrial and all of them are going through a normal process of refinancing half of this year and then the other half will be in the second half of the year.

Finally, the Trust held $1.7 million of cash at the end of the quarter and $22.9 million is available under its credit facilities. The one thing we did after March — the end of March, we increased the available amount of the credit facilities by $10 million. So it gave us $32.9 million remaining availability for the line of credit, then we have a possibility for an additional $10 million on the accordion that we have with the credit facility.

So, this completes our presentation. With that, we’ll move to the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Mark Rothschild from Canaccord. Please go ahead.

Mark Rothschild

Thanks. Good morning everyone.

Michel Léonard

Good morning.

Mark Rothschild

In regards to acquisitions and issuing equity, just to fund that, can you talk a little bit more about the thought process went into that? Was that something that was needed in particular, to make this deal work for the vendor and your thoughts on doing more of that in the future, considering where the unit price is?

Michel Léonard

Well, we love to do this kind of transaction, especially as you just mentioned regarding where the unit price is. And whenever we have the opportunity, we are going to go that route for sure. It’s an easy process, it’s not — and we have done it before.

So, it’s not the first time that BTB has done it. So it’s something that we have done before. We know how it works. And we were glad to see that our vendor was happy to take the BTB units in equity. I think that there’s a great advantage to them, and they saw the advantage by deferring their capital gains, and that’s something that they wanted to do.

And also, I can say that it’s — when we started the negotiation, obviously, our unit price was not at $3.19. So it was closer to $4. And for sure, the vendor at one point, basically realized that the unit price was going down and wasn’t too happy about this.

But overall, we know that the value of BTB is even higher than $4.50. So, I think that we were happy to see that there was patience on their front and very understanding. And I’m not just saying it just to say it, but great, great, great people.

So — and we had a relationship with them previously. We had concluded the transaction with them. So, we had acquired another property from them. But all this to say is that they’re great people and very understanding and they are and will be obviously patient as far as our unit price is concerned.

Mark Rothschild

Okay, great. Thanks. And maybe just one more question in regards to the vacancy that’s coming up that you spoke, I think it was in Edmonton. What’s the impact on FFO this quarter or next quarter maybe? And then what are the prospects for that? If you can just give a little more color on the prospects for that space.

Michel Léonard

Well, the prospects that we have, we — and that’s the unfortunate part. It’s a great building, and we have prospects to buy it. And our first intent is definitely not to sell it. It’s to lease it. But the way this property is and laid out and a huge track of land that is in back or on the side of this property, it’s just like — it’s a dream for certain, not investors, but owner occupiers.

And so we do have people that are interested in buying it. And so it’s obvious that at one point, we are going to have to make a decision on that front, but it is a great property to own long term — to own on a long-term basis as well.

So, we have to be a little bit, let’s call it, patient on that front in order to make a decision because it’d be — I’d be sad to see this property go. But if we have to — if we get the right price for it, then obviously, we’re going to let it go, but we’re not falling in love with the property.

But it is — I mean, as we are building an industrial portfolio, it’s a little bit sad to see that we bought a property and now we would sell it. But obviously, we would sell and redeploy the capital. So, it’s just — it’s difficult to accept. That’s all I’m saying, but it doesn’t mean that we’re not going to accept an eventual offer.

Mathieu Bolté

Mark, just to your question about FFO and AFFO, if you take about 55,000 square feet at $10 per quarter, that’s 87 million shares, it’s going to be material for the quarter — for next quarter. So we still believe in that property as well.

Mark Rothschild

Okay. Thank you so much.

Operator

Your next question comes from Munish Garg from Laurentian Bank. Please go ahead.

Munish Garg

Hi, good morning everyone. Just one for me. In terms of balance sheet, could you provide some more color to us on how should we view the balance sheet for 2023 and 2024? What are your objectives for next 12 to 18 months? And any sort of target range for debt to GDP?

Mathieu Bolté

Well, I think a couple of objectives that we have. Now we have 59% of leverage One thing first that we changed over the last two years is all new properties that we acquired, the max that we would have in terms of leverage is 60%. In the past, we were close to 65%. So, that’s my initiative that we think is more conservative.

The other thing, as Michel mentioned, we’re going through capital recycling. Some part of it could be applied against reducing slightly the debt. But I think most of it is as well related to the two debentures that are coming to maturity next year and the following one.

And what we expect is to not necessarily issue new debentures, but more versus — more changing that through equity. So, it’s going to be a mix of capital recycling. We talk as well in over the last 18 — well, 18 months as well the development project that is currently ongoing for one of our properties, which will generate equity that we currently don’t have on our balance sheet. I think it’s going to be creation of value and new equity. So part of it as well would partially be applied to reduce the debt level.

Michel Léonard

If I may add, there’s a series of debentures that have come to maturity in 2024 and another one in 2025. And obviously, we have our eye on these two series. But the first one, we can’t do anything before the month of November of this year. So even if we had the money in order to reimburse it, it would be too soon.

So, we have to wait until November in order to have more clarity as to what we’re going to do, how we’re going to do it. And then it becomes payable a year later. So, we can call it starting in November. And so we’ll have to monitor closely what we’re going to do as far as that’s concerned. But as Mathieu mentioned, our intent is not to issue other debentures.

Munish Garg

Okay, great.

Mathieu Bolté

There’s some of the two debentures that’s about 4% of leverage just to bear in mind.

Munish Garg

Yes, thanks a lot. I’ll turn it back.

Operator

Your next question comes from Gaurav Mathur from iA Capital Markets. Please go ahead.

Gaurav Mathur

Thank you and good morning everyone.

Michel Léonard

Good morning.

Gaurav Mathur

Could you just provide some more color on the $1.4 million non-cash adjustment in the revenue line?

Michel Léonard

Yes, I can. The $1.4 million was associated with a lease where there was an issue — an interpretation issue in the lease as to the amounts that were payable. And we basically adopted a conservative view in order to ensure that we would not basically overstate our performance.

We discuss the problem with our attorneys, with our auditors, and they were of the opinion that our conservative interpretation was not right. And as a result of it, the full amount that we had invoice, and we continue to invoice was the amount that the tenant was supposed to pay under the lease. And hence, we had to do a positive reversal of these amounts.

Gaurav Mathur

Okay, great. Thank you for that. And then just switching gears to same-property NOI growth. Now, given the strength in the industrial market across Canada, can you talk a little about the negative 5% year-on-year SPNOI growth in the industrial portfolio?

Mathieu Bolté

Yes, I think, Gaurav, in that one, one that I should probably provide it more on a cash basis, the NOI in this case was impacted slightly in a favorable way last year, last — first quarter of last year because of the 13 invoice compared to this year where we do the exercise as well, it was a bit more negative this year.

So that creates a bit of a disconnect and as well the straight line rent. So, excluding that, that was about $200,000 of impact year-over-year. So, without that, we would be back to a positive NOI for the industrial book.

Gaurav Mathur

Okay. Okay. And then just on–

Michel Léonard

Gaurav, sorry to interrupt you, but I just wanted to continue on the same train of thought. We don’t have industrial leases coming to — we didn’t have industrial leases coming to maturity in 2022. So, there’s basically no change on that front.

And in 2023, we have one lease that came to maturity that we just disclosed. And aside from that, we don’t have maturities — any material maturities in the industrial segment. And so it’s going to remain flat.

So it’s very — aside from that lease where we think that we’re going to be able to — if we release the property that we’re going to be able to get some lift versus what the previous tenant was paying.

However, aside from that, it’s going to remain flat. And we’re seeing leases that are starting to turn next year and where we do forecast that there is going to be an increase in the net rent next year, obviously, if the industrial segment remains as hot as it is today.

Gaurav Mathur

Okay. Okay, great. And then just lastly, on fair value adjustments on investment properties, given the volatile macroeconomic environment and the rate and sector outlook, it’s interesting to see the fair value adjustment to zero this quarter. So, I’m just curious as to what’s driving that.

Mathieu Bolté

Hey Gaurav, we’ve been quite proactive starting in Q3 last year to adjust fair values. We did another round in Q4 last year. What we did in Q1, I think we were, again, quite conservative with the approach that we took last year.

So, we did — with the valuation, the external valuation team, we did a full review across Canada for the properties that we own and where we stand. And we were comfortable with the current values and what we did at the end of last year.

Michel Léonard

And I mean we did have a meeting with Altus prior to publishing our financial statements in order for — to get their opinion as to whether there was movement within the cap rates of our portfolio.

And given the fact — as Mathieu mentioned, given the fact that we did adjustments in Q3 and Q4, contrary to many other REITs that didn’t, they feel very confident that the value that was proposed for our IFRS was the correct value.

Gaurav Mathur

Okay, great. Thank you for the color gentlemen. I’ll turn it back to the operator.

Mathieu Bolté

And just — maybe just one comment, Gaurav. Michel mentioned it before, but as we look at some of the properties that we disposed last year and some that are in the pipeline for this position this year and for which we have offers on our properties as well. We talk about small office building, we feel comfortable as well with the proposal that we’re seeing on that front.

Gaurav Mathur

Okay, great. Thank you for the color. I’ll turn it back.

Operator

Your next question comes from Tom Callaghan from RBC Capital Markets. Please go ahead.

Tom Callaghan

Thanks. Good morning guys.

Michel Léonard

Good morning Tom.

Tom Callaghan

Just more on that theme on the capital recycling here in the office. Can you give any sense as the kind of ballpark proceeds on those potential dispositions and kind of time lines you’re looking at?

Michel Léonard

What we have in the pipeline for dispositions right now is roughly between — if everything pans out, which — and you know that in life, it’s not everything that pans out.

But we are between $40 million to $60 million of office dispositions. And the timing is, I would say, before — it would be scattered throughout the year until the end of September now.

Tom Callaghan

Okay. Thanks. And then just one more from me, a quick one, but I know you submitted the proposal to the city in terms of that first densification product. Just curious, have you heard any commentary or questions back to you guys?

Michel Léonard

No. Right now, the city is basically deciding as to which course they are going to take in order to propose or implement, I should say, it’s not proposed, it’s implement a zoning change I think that everything has been said, everything has been done. And now it’s in the hands of the city in order to implement it.

So, it’s — unfortunately, Tom, the normal course of getting a zoning change when the owner, their urbanists, lawyers, representatives, experts have done all their work in order to see traffic flows, the sufficiency of the city services serving the property and so on. So, all the different expertise have been filed with the city, and now it’s just in their hands in order to see how they’re going to go about implementing a zoning change.

So, so far, it’s been well received. We’re not getting any signals that yellow lights or red lights, we’re seeing green lights. So we’re just — it’s in their hands right now. And it’s in the unfortunate part where we have to sit on ours, while they do what they have to do in order to implement.

Tom Callaghan

Understood. Thanks Michel, I’ll turn it back,

Operator

[Operator Instructions]

Your next question comes from Matt Kornack from National Bank Financial. Please go ahead.

Matt Kornack

Good morning guys.

Matt Kornack

Good morning Matt.

Matt Kornack

On the retail side, with regards to the Mobilia in Saint-Bruno, can you give us a sense — I may have missed it in your commentary as to what’s going on there?

Michel Léonard

It was — the story with Mobilia is very simple. During COVID, they were — they had a hard time supplying their customers with furniture. And there were huge delays in order to get deliveries of the furniture.

So, they went ahead and they overpurchased during COVID. And I think that this is sort of a sign that you see with the larger retailers, I think we saw it with Walmart, where their warehouses are busting at the seams.

Well, in the case of Mobilia, their warehouses couldn’t handle what they had ordered. So, they just wanted on a three, four-month basis, I forgot if there was four or maybe a little bit longer, I forget, but they needed a place and we had 30,000 square feet that was vacant.

And so they used it temporarily. And we knew that this was a temporary lease, it was an accommodation basically. They paid us rent. But all this to say that we knew that this was not going to be significant nor be a permanent tenant within this property.

Matt Kornack

And do you have prospects for the space at this point in all necessity-based retail is still quite solid from a leasing standpoint?

Michel Léonard

We do. We do. We’ve had started — as I reported earlier this year, we did go to ICSC in Whistler and met with large national tenants and we are in discussion with one such large national tenant, not for the whole space, but for part of the space.

And so we’re willing to subdivide the space in order to have three instead of having only one tenant for 30,000 square feet, maybe two or three tenants. So — and we got a positive signal from them. We met them again two weeks ago, and we got positive signals basically saying that they were going to paper a transaction for a part of that space.

So — and we have another prospect not in the same center, but for another space that we are renewing on a yearly basis with a tenant that is not paying us what the market should bear.

And as a result, we renewed temporarily that tenant on a yearly basis with rights to terminate in order to accommodate a substantial tenant — a national substantial tenant that would take that space and increase substantially NOI within that property.

So, there’s — I mean, just to give you a color, there’s — we’re seeing a lot of activity from national retailers at all our retail sites. And this is probably where we’re most busy. And as we — as far as negotiating and putting in place.

And again, in the office segment, as we reported, we closed 67,000 square feet of new leases in the office segment. So, showing that at least — I’ll speak to our properties and not for generally the market, but it seems that we’re getting traction in our office buildings, and this is a good sign as well.

Matt Kornack

And on that front, Michel, with regards to the 2023 maturities, what remains, like what would be your ideal kind of retention rate for tenants in the portfolio? And if you do lose somebody, like what is the demand on taking that space from new leasing as well?

Michel Léonard

I think that throughout, if you exclude the temporary lease with Mobilia, I think that we’ll be north of 70% retention.

Matt Kornack

Okay. No, that’s very helpful. With regards to the debt maturities this year, the rate is higher. I assume, Mathieu, that, that has to do something with some of the variable rate debt outstanding is in the 2023 maturity number, but does it actually mature this year? Is that just the way it’s been presented? And if it does, is there an opportunity there to kind of reduce your interest expense on that?

Mathieu Bolté

Yes. Out of the six properties that we have to refinance, two are variable. And variable, it’s been already at high rates that we have on those two properties. So, in terms of refinancing those, I don’t see any risk in terms of differential for interest rates.

The other four, those are loans that have been underwritten more than five years ago in terms of mortgages, so the replacement cost is higher. I think what we’re seeing is about 150 basis points for about $40 million of the $68 million that we have to refinance.

Matt Kornack

Okay. And what would be a spread today for — I guess that depends on asset class, but generally for secured financing spreads they remained.

Mathieu Bolté

Yes. If you look at GUC five years — GUC five years plus about 200 basis points.

Matt Kornack

Yes. And then just two quick ones accounting-wise. The leasing costs, internal leasing cost add back, I think it was $356,000 this quarter. It was a bit higher last quarter. I know there’s an allocation of some income there. But should we — should that $356,000 be kind of a good run rate? Or how should we think of that addition.

And then maybe quickly, just on the $1.4 million non-cash item. Should that — does that fall all the way through? Or is there an offset at some point in the income statement?

Mathieu Bolté

Yes. So, your first question, I think it’s a good run rate to use for the rest of the year. The second question, the $1.4 million is a onetime adjustment. I don’t expect any other adjustment coming from that.

Matt Kornack

Okay. So, if we were modeling — we should take that out of our revenue number and then grow that revenue at our growth rate.

Mathieu Bolté

Yes.

Matt Kornack

Okay, fair enough. Thanks guys.

Operator

At this time, there are no further questions. Please go ahead, Mr. Leonard.

Michel Léonard

Thank you very much for participating in our conference call this morning. Our results are in line with our budgets. We’re happy to present these results. I think they’re very positive. And we’re seeing a performance from our portfolio that should really increase throughout 2023.

As I mentioned, there’s leasing efforts that are tremendous. And it’s not only the occupancy rate that we can see that is going to be affected by the leasing efforts that we’re putting together.

It’s also our NOI because as there are leases that are coming to maturity that are basically below market as there was at least in retail that you saw with an increase in 38% or almost 39%. We see that in the portfolio, we have these opportunities as well.

So, thank you very much again to have your participation to this call today, and we’ll see you when we report Q2 a little bit later this year. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.