BTB Real Estate Investment Trust

TSX:BTB.UN

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Jessica, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust 2020 First Quarter Ended March 31, 2020 Financial Results Conference Call. [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 known and unknown risks and uncertainties that may cause the actual results of BTB Real Estate Investment Trust to be materially different from those expressed or implied by such forward-looking statements. The risks, uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust's management discussion and analysis of financial results and in its annual information form, which will be filed on SEDAR and on BTB's website at www.btbreit.com. I would like to remind everyone that this conference is being recorded. Thank you.I will now turn the conference over to Mr. Michel Léonard, President and Chief Executive Officer; and Mr. Benoît Cyr, Vice President and Chief Financial Officer. Mr. Léonard, you may begin your conference.

[Michel Léonard, President, CEO & Trustee]

Thank you. There is an additional person that is participating from BTB side on the conference. He is Mathieu Bolté who will be assuming the responsibility of Benoît Cyr, who is up for retirement in September of 2020. And Mathieu will take the helm of the CFO's responsibility as of May 25. So I'd like Mathieu to basically go through his career and why he came to BTB as a first statement for this conference call.

[Mathieu Bolté]

Thanks, Michel. Good morning, everyone. First, I really look forward to joining the BTB leadership team and leading the finance organization and to contribute to the company's success. As Michel mentioned, I'll start on May 25, and I'll have the chance to transition with Benoît over the next weeks.From a career standpoint, I was most recently the CFO at Ivanhoé Cambridge for the real estate subsidiary at the Caisse de Dépôt et Placements du Québec. I also spent 12 years with GE and GE Capital in global financing senior roles, led teams as part of the internal audit group. I was also the Head of FP&A for GE Capital in Canada between 2008-2010 during a challenging environment. And then I moved as the finance lead for GE Capital America to support all M&A and business development projects during the transformation of GE Capital. I then moved to Latin America to work for Éxito group to lead the finance operations in the region. So Éxito is a retail and real estate public company in Colombia, and it's the subsidiary of Casino Group, a French retailer in real estate. Really look forward to bring my contribution to the organization and to navigate this current cycle and to deliver value for BTB in the long run. So thanks.

[Michel Léonard, President, CEO & Trustee]

Thank you, and we will enjoy your participation in the success of BTB. And obviously, it is with a lot of sorrow that we see Benoît leave at the end of September, but we will have other opportunities in order to thank him. You probably saw that in our documentation, we did many testimonies regarding Benoît's contribution. Benoît started with us, just as a quick reminder, we were less than 5 employees. In 2007, we had less than $50 million of assets, and he supported our growth via fund raises, whether it was financings through mortgages and acquisitions and so on. He helped me through at least, I would say, 100 acquisitions or more than 100 acquisitions through this process. And if we acquired 100 properties, then we obviously financed and refinanced at least double that. So his contribution was exemplar and of a great, great help to bring BTB to the level where we are today at close to -- or surpassing $900 million of assets. So quite the road, quite sometimes a highway, not just a road, but it was great to have Benoît on board.So I'd like to state secondly that we have no COVID cases in our properties. So we are not aware of anybody that is infected with COVID within our workforce nor in our tenancy. I will quickly go through our rent collections for the months of April and May 2020. Our strategy has been and many -- not unlike other REITs to grant a 60-day deferral of base rent only repayable before December 31, 2020, to certain qualified tenants. And that has gleaned results for the April month, the month of April, where we collected 79% of our rents and agreed to a 5% deferral. So that means that we basically collected 84% of our rents for the month of April.We received 92% of office in the Office segment -- no, sorry, 92% of our rents in the Office segment, 60% of our rents in the Retail segment, 62% for Industrial and our Mixed-use Properties at 84%. Our May collections to date are a little bit ahead of our collections for the month, the similar date in the month of April. So we're trending slightly higher than April, where we collected 56% of our rents to date, and that number is on May 11. And we agreed to 4% of the rent deferrals, so for a total of 59%.As you may surmise, retail is the most challenging segment, and it represents 28% of BTB's portfolio, and it has an occupancy rate of 95%. Also, I'd like to remind you that we don't have -- we don't own enclosed malls, and most of our retail tenants are national and necessity-based tenants. The Office and Industrial segments did perform better, and we believe that we are well positioned to navigate the uncertainty given the composition of our portfolio and our tenant base. We started the consignment in Québec City, and that has obviously helped us receive rents in our collection for the month of May. Montréal is still not the confined. And I'd like to also point out that our Ottawa portfolio almost received 100% of its rents, where we have one industrial tenant with an issue.We did put in place measures to preserve our liquidity. We cut all necessary -- nonnecessary capital expenditures. We are still investing in TIs for lease renewals and new tenant sittings. You saw that there are certain firm lease commitments, and we are abiding by the terms of these firm lease commitments in order to receive rents later this year. We've postponed all bonuses for employees. We postponed 25% of the salaries of management and trustees. There's not going to be salary increases in 2020. We reduced our operating cost, where -- especially in the energy, cleaning and maintenance sector. We have deferral of monthly interest and capital payments with our lenders. And we have municipal tax deferral agreements in place for certain municipalities. We did announce a reduction of distribution this morning. It's never a pleasant step. The economic outlook has deteriorated and forced us to evaluate the long-term effect of this challenging environment. We wanted to reduce the strain on our cash flow. And to do so, the Board of Trustees has elected to reduce distribution from $0.42 per year to $0.30 per year. We are maintaining the DRIP and all this is in the midst of the economic news that are -- that we are gleaning from the CBRE institute or others basically stating that we're entering into a recession. 9% drop in the March GDP, a drop in total employment, and we are seeing our rents collection deficiency and the possible increase in the number of bankruptcies and insolvencies, especially in the retail sector. So we believe that our distribution at this level is sustainable and it will allow us sufficient liquidity to support any shortfall in cash flow.Now to the Q1 results. In summary, we did have a higher occupancy, higher rental rates and lower operating costs for Q1 2020 versus Q1 2019. Our occupancy -- our organic growth was off to a solid start. Our occupancy rate is up from 71.7% to 92.4%. However, down from Q4 2019, mostly as a result of the sale of 2 industrial properties that were 100% occupied.Our operating metrics, we saw a 10.3% increase in rental income, a 15.5% increase in net operating income and a 75% increase in adjusted net income. An increase of 3.6% in the same-property portfolio net operating income. An increase in distributable income per unit from $0.094 to $0.099, of recurring FFO per unit from $0.084 to $0.10 and recurring AFFO per unit from $0.083 to $0.088. We saw again a reduction in our mortgage debt ratio from 54.3% to 52.8% and our total debt ratio from 61% to 59%, relatively the same as at December 31, even if we recorded a decrease in our asset value. Operating expenses as a percentage of rental income decreased by 2.4%.Regarding our leasing, we saw very positive spreads. We -- increase in the average lease renewal rate of 4.1%, the Industrial segment increased by 9.2% and the Mixed-use segment increased by 7%. We renewed 237,000 square feet of leases during the first quarter. And for the first quarter, our retention rate was 36%. Of noteworthy, all the federal government office leases that we had in Ottawa and Gatineau, Québec, were renewed.Our average -- weighted average term of leases is similar to other quarters. And our in-place rental rates are generally below market rents as evidenced by our ability to still increase rents and deliver an increase in same-property NOI.During the quarter, we concluded new leases of 25,000 square feet. And we also recorded a reduction in our fair value of our portfolio of $7 million. And that's based on a potential decline in NOI in 2020 as a result of the COVID pandemic and the market uncertainty thus created. And Benoît will delve into the details as to how we calculated this decrease in IFRS value. We did also increase our bad debt provision, given the economic outlook. And we adjusted our budget for lower rent growth and potential lower occupancy. So to -- so also a fair market value in derivative financial instruments was recorded in order to reduce income. We did dispose in January of a property located in Ingersoll, Ontario, as we had previously announced during our last call. It was a property that was sold for $13.3 million, and we had paid $10.7 million. In February, we disposed of an industrial property in Montréal for $9.3 million, and we had paid $7.6 million for this property in 2011. We did conclude an acquisition of a 77,000 square foot office property in Ottawa for total proceeds of $21.8 million. The major tenant is WSP Canada. And as part of this acquisition, we have excess land that we could build an additional building of roughly 60,000 square feet on to this -- adjacent to this property.Lastly, the government programs and subsidies. As you are aware, Canada has issued a Canada Emergency Commercial Rent Assistance program. We do intend to work with our tenants regarding this program, and we do work with our tenants in order to reduce their obligation and postpone their obligation. But so far, the Canada Emergency Commercial Rent Assistance program has proven to be futile regarding its application to our tenants and to ourselves.Regarding the other program that we may benefit from, which is the salary grant or salary subsidies. So far, we don't qualify for the program during the -- for the month of April because we did collect more than 70% of the scheduled revenues.So with this summary, I'd like to pass on the presentation to Benoît, who will delve into the details of our results.

[Benoît Cyr, Executive Officer]

Thank you, Michel. Good morning, everyone. As mentioned, we did 2 dispositions during the quarter and purchased 1 property, Michel just described these transactions. So at the end of March, our portfolio consisted of 65 properties, representing close to 5.5 million square feet of rentable area and having a market value of approximately $920 million.As explained in our MD&A, the following firm leases will take effect in the next quarters. Over 26,000 square feet leased to City of Laval in our 3131 Saint-Martin Boulevard property for an annualized estimated income of $730,000; 8,200 square feet leased to Eventure on our Migneron Boulevard property for an annual income of over $100,000.The SQI Québec government leased a 7,400 square feet in our office building on MacDonald Street in St-Jean-sur-Richelieu for an annual income of $160,000. These 3 new tenants will add approximately $1 million of new revenue on an annualized basis. Finally, we've signed a lease with Telus, who will move in shortly in our head office building corner of Crescent and Sainte-Catherine in Montréal, but will start paying rent in 2021. The estimated annual revenue is about $530,000.For the quarter, rental revenues were up 10% or $2.2 million compared to the same in 2019. The 4 properties acquired in the last 4 quarters contributed to an increase in rental income of approximately $2.6 million in Q1. And we estimate the income shortfall associated with the properties disposed during the same period to be approximately $0.9 million. Therefore, the net contribution to rental income of these real estate transaction is estimated at $1.7 million.We recorded an increase in our operating expense of 4.9% or $0.5 million between the first quarter of '19 and the first quarter of 2020. Energy costs decreased by $332,000 or 17%, mainly due to a nonrecurring Hydro Québec credit program, which took effect in last January. Total credits received from -- for our properties that are supplied by Hydro Québec was $207,000. Our NOI is up $1.7 million or 15.5% for the quarter compared to the same in '19 and is at 53.5% as percentage of revenues. Acquisition completing during the last 4 quarters contributed to an increase in our NOI of $1.5 million in the -- in Q1, while shortfall from disposal completed during the same period is estimated at $0.5 million. Financial expenses are up $7.9 to $9.4 million. We've accounted an expense -- as expense a fair value adjustment of $4,097,000 of our swaps. This adjustment of value is recorded as an increase of financial expense and is due to lower interest rates in Canada, and we've accounted as revenue a fair value adjustment of $1 million on our Class B LP units at the end of March. This adjustment of value is due to a decrease in value of B LP units. These 2 noncash items explain most part of the financial expense increase. Our average weighted contractual rate of interest on mortgage loans is now at 3.71%, 26 basis points lower as at the end of Q1 '19. The weighted average term of our mortgage loan portfolio is 5 years.Interest rate on first mortgage -- on first rent mortgage loans range from 237% -- 2.37% to 6.8%. Our Trust administrative expenses are at $1.2 million compared to the same in Q1 '19. We've accounted a credit of $173,000 for our unit-based compensation plan due to a decline in value of our units. There is a typo -- I want to note that there's a typo in this section of our MD&A. The first item in Q1 '20 administration expenses should have been $1,232,000 instead of $1,185,000. The total is correct.To appraise our portfolio at the end of each quarter, we use cap rates provided by external valuators at the end of the first quarter. We've recorded a decrease in the fair value of our portfolio of $6.9 million. As you know, the COVID-19 pandemic has created significant economic uncertainties and increased the volatility in the financial markets. These factors have led us to review upward certain cap rates of properties considered to be more vulnerable, especially some retail properties where tenants have no temporary have to -- sorry, where tenants had to temporarily cease operations and requested rent relief and deferrals.We also estimated that the value of our real estate portfolio needs an adjustment, and we've recorded a decrease of value of $6.9 million. The weighted average cap rate for the entire portfolio is 6.65% at the end of March '20 compared to 6.82% a year ago and 6.60% at the end of last December, so an increase of 5 basis points. We present a net loss of $5.8 million for the quarter, $0.089 per unit compared to a net income of $1.1 million in Q1 '19 or $0.025 per unit. This loss is essentially due to nonmonetary items as the reduction in the value of our portfolio for $6.9 million, as just explained. And the net adjustment of the value of financial Instruments and Class B LP units for $3.1 million.The same-property portfolio for the quarter shows an increase of 1.1% of its revenues, an increase of 3.6% of its NOI and an increase of the property net income of 5.5%. Our distributions increased from $5.1 million in Q1 '19 to $6.6 million in Q1 '20, including 12.6% of our distributions in units under the DRIP. Our distributable income for the quarter amounted $6.2 million or $0.099 in compared to $5.3 million and $0.094 per unit a year ago.Our distribution payout ratio for the quarter stood at 106% from 111.6% in Q1 '19. Our recurring FFO reached approximately $6.3 million for the quarter compared to $4.7 million last year, $0.10 per unit this quarter compared to $0.084 a year ago. Finally, our recurring AFFO amounted $5.5 million, $0.088 per unit from $4.6 million and $0.083 per unit last year.Our balance sheet presents investment properties at fair market value amounting $920 million compared to $924 million in last December and $880 million in March '19. We have $2.7 million in cash, a balance of sales receivable of $6 million at an interest rate of 7%, and other assets amounted $11.9 million. We spent approximately $543,000 in recoverable and nonrecoverable CapEx during the quarter. Also, we spent $2.5 million in TI to meet the specific needs of our clients as well as commissions to brokers. And especially in our Brewer Hunt property in Ottawa, where we welcome Satcom this winter, and in our Saint-Martin Boulevard property in Laval.Mortgage loans payable amounted $495 million at the end of March and were at $493 million in last December, and $455 million in March '19. Our mortgage loan-to-value ratio is now at 52.8%, the same as in last December and compared to 54.3% in March '19. We have 2 series of debenture outstanding for a net book value of $49.2 million, the new Series G for a principal of $24 million and the Series F for principal of $26.7 million that is now -- that are now redeemable and maturing in December 2020. At the end of March, we're using $13 million on our acquisition line of credit and $1.6 million on our operation line. We have $62 million of mortgage loans coming to maturity in the rest of 2020. We are in discussion with CIBC to renew mortgage loan on all spaces South Shore of Montréal, and we are confident to increase the loan by $2.5 million at a better interest rate. The actual rate on this loan is approximately 4.35%. Other loans are mostly maturing in Q4 of this year, and we have not yet started discussions with lenders.Let's discuss a bit about measures we put in place to pass-through the COVID-19 crisis. I just -- as of this morning, I just have new numbers. We've collected 81% of our April rents, so 2% more. And we've signed formal agreement for 5% of our April rents with tenants to postpone their rent that will normally be payable by the end of this year. And also as of this morning, 58% of our May rents have been collected, a similar portion as the same date of April's rent.We've negotiated the carryover of capital, interest or both on monthly payments with most of our lenders and mostly on retail and industrial properties. As of May 8, payments totaling $3.1 million from April to October were deferred by our lenders, mostly until the maturity of these loans.We took benefits from the municipal tax deferral programs offered by Québec municipalities. We estimate payments totaling approximately $4 million were deferred for at least 1 month and some for few months, but all deferred payments must have been reimbursed by the end of the year.As mentioned, all executive and manager 2019 bonuses have been postponed till the end of the year, trustees and senior management agreed to a 25% salary reduction deferred until the end of this year. We've put efforts on reduction of operating expenses and CapEx. We review carefully development and renovation progress -- projects, CapEx, utilities, maintenance cuts to reduce and postpone as much as possible. Difficult at this time to evaluate the value of these reductions, but we are confident that it will be material and helpful.Finally, as previously discussed, we've decided to reduce our monthly distribution from 2.5 to -- from $0.035 to $0.025 per month, starting with the May distribution payable in June. It will preserve between $550,000 and $600,000 monthly depending on the credit level.That's all for my section, but before turning back to the facilitator, I would like to take a few minutes. About a year ago, I informed Michel, the Board and my colleagues that I would like to retire in September 2020. I'll be at that time 65, with 42 years active on the labor market, 20 years in a CPA firm, 9 years as CFO of other companies and the last 13 years with BTB. This last year went so fast and today is officially my last reported quarter with you guys.During these 13 years, I participated in about 90 to 100 closed acquisitions for approximately $1 billion in value. Probably a lot more than $1 billion of financing and refinancing on these properties, 28 dispositions for about $135 million. I don't know how many potential acquisition have been analyzed and audited. We did 16 public offerings, of which 6 series of debentures for $130 million. 10 equity offering for about $300 million, one private placement in 2007 for $45 million. 54 quarters reported, 14 annual reports and AGM, the last one being in few weeks.But what I'm the most proud is to have contributed to build, organize and structure a beautiful organization, and to have recruited a dedicated, competent and loyal accounting and finance team. I would like especially to thank Michel, Jocelyn Proteau, our Chairman, and all the Board members for their trust and their constant support during this period that has not always been easy, just remember the 2008 financial crisis. And to all you guys, thank you for enduring my spoken English, sometimes blatter and my Québécois accent during all these years. Thank you.

[Michel Léonard, President, CEO & Trustee]

Mathieu will have definitely big shoes to fill and a learning curve that is going to be quite rapid. And -- but we do trust that we did pick the right individual to carry on the responsibility and be able to achieve greater heights in the coming years. And I'm sure that Benoît, too, as holding of units in BTB is going to be proud of the eventual results. And we do thank Benoît and the Board and the Board members, the trustees who were quite [ eulogious ] regarding Benoît's contribution over the last 13 years. And it's -- we know that every good thing has an end and it is -- I can't say unfortunate because I think that it is the wish that Benoît has put for himself. And -- but we do wish him the very best in the coming years. So with this, we'd like to turn the floor to questions. So we're ready for questions from analysts.

[Operator]

[Operator Instructions] Your first question comes from [ Paul E. Gernon ], he is a shareholder.

[Unknown Shareholder]

Yes. Good morning, Mr. Léonard. My name is [ Paul Gernon ], I'm in Burlington, Ontario, and I've had e-mail messages with Stephanie. I would like some further clarification on the word futile that you used in discussing shared rent programs with the government, I assume, both federal and provincial. Is it just too soon to see how that is turning out? Or is -- what is the problem that made you say the word futile?

[Michel Léonard, President, CEO & Trustee]

Well, the first issue comes from the fact that the federal program is only valid for tenants that have global or total revenues of no more than $20 million. So when it comes to some, if not a lot of our tenants, they do generate more than $20 million of revenue. The second point is the fact that under the plan, the tenant would have to pay 25% of its rent. We would have to forgo 25% of the rent, and the grant of the government would cover 50% of the rent. But we found out through -- we've learned through our mortgagee that the plan or the program -- we had known that the plan was managed by the CMHC. So CMHC manages the plan, CMHC receives the money from the federal government and CMHC disburses the amount of the program to the mortgagee. So the 50% of the rents that we're supposed to receive go directly to our mortgagee's hands. So once in the hands of the mortgagee, then the mortgagee has to decide whether it's going to give us these monies directly. We had discussions with at least one of our lenders, and this lender basically told us that they would not pass on the amount of the program to us, and they would keep it in order to apply it to the principal owned -- owed under the loan. So that's why I'm saying you that it's futile because cash flow wise, although the program would be in place, it is highly likely that we would not receive the payment of the subsidy for the 50% of the rent payable.Under normal circumstances, and if we had 100% guarantee that we would receive the 50% of the rents payable as a subsidy, then we would be the first group to embark on to the program and do forgive the 25% that the tenants would have to pay us under this program for a 3-month period. But unfortunately, given the fact that the -- our lender has the option of keeping the money because there has been no -- as I understood, there has been no specification from the federal government nor the CMHC to the effect that the monies have to be returned to the borrower, hence, the futility of the program.

[Operator]

[Operator Instructions] All right, there are no further questions at this time. Please proceed.

[Michel Léonard, President, CEO & Trustee]

Well, in conclusion, I'd like to thank you for your support. The results that we provided in -- for the first quarter are solid. They are a testimony to all the work that we have done over the last 24 months of repositioning our portfolio, and we're seeing that the results are -- that provide the rejuvenating of the portfolio are there, they are present. Obviously, as everybody would tell you, it's too bad that we're stuck in a pandemic because our forecast was great for 2020. And unfortunately, now we have to sit on our hands a little bit in order to -- sit on our hands as far as acquisitions are concerned. But it is what it is and we accept it, and we have to work with what's been given to us. But if you look at our evolution of our rental income from 2015 at $18 million to 2020 at $23 million or almost $24 million; our net operating income in 2015 at $10 million, now we're almost at $13 million; our distributable income from $4 million to $6 million and from the area that we have under management over the same period that has still grown.And so again, we thank you for your trust. We're in it for the long haul. We're not looking at these opportunities on the short-term basis, we're looking on a long-term basis. We're working with our tenants, looking -- taking the view that we want them on a long -- again, long-term basis. So our solution is to basically work hard and get it done and move on to the next phase of the growth of BTB. And also to make sure that our governments and our medical staff around the world finally find a vaccine for this pandemic and that we will be able to continue our business affairs. Probably not on the same normalcy that we have known, but in a new normal that should be beneficial to BTB. So with this, thank you very much, and thank you for understanding the fact that we did have to reduce our distribution. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.