BTB Real Estate Investment Trust

TSX:BTB.UN

Earnings Call Transcript

[Operator]

Good morning. My name is Simon, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust 2018 First Quarter Ended March 31, 2018 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 are 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. Benoit Cyr, Vice President and Chief Financial Officer. Mr. Léonard, you may begin your conference.

[Michel Léonard, President, CEO & Trustee]

Thank you, Simon. Good morning, everybody, and welcome to our Q1 2018 conference call. If I'd like -- I'd like to start by summarizing certain of our activities for the first quarter, where we saw a 12.6% increase in our rental income, a 16% increase in our NOI, a 1% increase in our same-property portfolio NOI. Our FFO went down to 88%, and our AFFO went down to 97%. Our mortgage rate -- our mortgage debt ratio went down to 56%, and we saw a slight decrease in occupancy rate to 89.3% as a result of Philips Lighting leaving our Cornwall property, it being 90,000 square feet, to regroup its operations in Toronto. Our strategic repositioning is bearing fruit, and in 2018, we will continue our disposition, and we have [ violated ] our Sherbrooke properties -- all of our Sherbrooke properties to be sold during 2018. We are -- these properties are presently being marketed by Colliers and soon, we will see the level of interest. We have sold 4 properties in the first quarter for a total consideration of $12.4 million, and they include our Crescent Head office; the Trans-Canada highway property; the Marleau property in Cornwall, a small Marleau property in Cornwall, the 2905 Marleau; and our Drummondville property. We are currently in due diligence regarding the sale of our Chemin Chambly property in Longueuil. The other properties for sale are still Antonio Barbeau; our Harvey property in Saguenay, where we have received last week 2 offers for the property; our Thetford Mines property, where, last week, we did receive an offer; and 85 St-Charles, where we have not received any offers; and the Magog property, where we have not received any offers. Regarding our summary of our activities regarding the first quarter, I said that our acquisitions are bearing fruit, and they're showing their effect on our results as compared to the dispositions of late. Thereby, our rental income increased by 12%. Regarding our lease renewals, 236,000 square feet of rentable area expired during the quarter, and we renewed 141,000 square feet. Our retention rate for the first quarter was 40%, and that is caused by our tenants in Cornwall, Philips, as I mentioned earlier, its lighting division. It exercised, 1 year prior to its expiration, an early departure provision in its lease. They are, as I mentioned, consolidating their activities in Toronto. As well, we leased 107,000 square feet to new tenants. Our lease renewals have generated an increase of 0.5% regarding the NOI for these properties, and we have 84,000 square feet of leases that are subject to firm agreements. So I can summarize the leasing in our problematic buildings, the list is going down regarding these problematic buildings as we've sold some. We are still in the Complexe de Léry and Three Rivers, still trying to attract new tenants. Our King Street property, that shows an occupancy rate below 80%, is part of the Sherbrooke properties scheduled for dispositions. The Harvey property in Saguenay, where we haven't been successful in leasing any square feet during the 2017 year, and as I mentioned earlier, that property is for sale, and we did receive 2 offers. The Complexe Lebourgneuf - Phase I in Québec City, we have a good leasing velocity. As I mentioned during our last call, we did move one of our tenant that were -- that was on the third floor to the ground floor. And this construction being completed, now we have the third -- part of the third floor for lease, and that we do have interest in the third floor -- a part of the third floor for leasing. The challenge now in Cornwall is being 725 Boundary Road, where Philips Lighting was located. Regarding an acquisition, we did acquire a small property in Delson for $1.8 million, very small. It was a ground floor of a retirement home located immediately or adjacent to our property. The developer, TRIGONE, in partnership with [ Lafone de Cabayer ] de Québec is building this residential facility as well as 450 doors for condos and rental units in close proximity to our property. In a defensive move, we opted to purchase the property because the retail ground floor of the retirement home would have been in direct competition with the leasing of our Delson property, hence the decision to purchase this property. So further to this summary of our activities, I'd like to ask Benoit to delve into the details of our results for the first quarter of 2018.

[Benoît Cyr, VP & CFO]

Thank you, Michel, good morning, everyone. As mentioned, we've sold 4 properties during the quarter. On January 19, the 1863-1865 TransCanada Highway in Dorval for a selling price of $5.7 million. This property has been acquired in 2007 for $2.6 million, and we have recently invested about $1 million in its redevelopment. On February 6, we sold the 2905 Marleau in Cornwall for about $500,000, and this property has been acquired in 2007 for about $200,000. On February 26, we sold the property located on Boulevard St-Laurent in Drummondville for a selling price of about $3.1 million. This property was acquired in 2008 for $3.4 million. And finally, on February 1, we've sold our head office building on Crescent Street in Montreal for $3.2 million and for which we realized the net gain of $1.2 million. Also I'd mention, in February, we purchased a newly developed retail property close to our Delson Shopping Center for a purchase price of $1.9 million. At the end of March, our portfolio consisted of 71 properties, representing close to 5.4 million square feet of the rentable area and having a market value of approximately $745 million. For the quarter, rental revenues were up 13% or $2.4 million compared to the same in 2017. This increase is due to the recent acquisitions we did in Q3 and Q4 of last year. We recorded an increase in our operating expenses of 8.5% or $0.8 million between the first quarter of '17 and the first quarter of '18. Property taxes on recent acquisitions explain this increase, while repairs, maintenance and other operating expenses remained stable from 2017 to 2018. Our NOI is up 16% for the quarter compared to the same last year and is at 53.4% as percentage of revenues. Financial expenses are up from $4.6 million to $5.2 million or approximately 14% for the quarter, mostly due to mortgage loans on property recently acquired and to the use of our lines of credit. We've also accounted the fair value increase of $528,000 on our swaps at the end of March. This increase of value is regarded as a reduction of financial expenses and is due to recent increases of interest rates in Canada. Our average weighted contract weight of interest on mortgage loans is now at 3.80%, 1 basis point higher as of the end of Q1 of last year, and the weighted average term on our mortgage loan portfolio is 6 year and 4 months, 7 months more as a year ago. Our [ trust ] administrative expenses are at $1.1 million compared to $1.0 million last year, and we've also accounted $133,000 for our unit-based compensation plans. To appraise our portfolio at the end of each quarter, we use the capitalized NOI basis. We recently -- we received a quarterly cap rate from external charter evaluators and independent experts. These report provide a range of rates for various geographic regions and for various types and qualities of properties. We use cap rates within the ranges provided by external evaluators, and we have so estimated that the value of our portfolio recorded in the balance sheet at the end of March adequately represented its fair market value and that no material adjustment was required. The weighted average cap rate of the entire portfolio was at 7.08% at the end of March compared to 7.19% a year ago. We present a net income of $6.6 million for the quarter, $0.135 per unit compared to $4.0 million a year ago or $0.094 per unit. The same-property portfolio for the quarter shows a small decrease in its revenues, but shows small increases in the NOI and on the net property income of, respectively, 0.1% and 1.0%. Totaling challenging leasing activities during the last 2 quarters, we expect the same-property portfolio NOI to show neutral results or small increases for the next quarters. Our distributions increased from $4.5 million in Q1 to 5.1 -- in Q1 '17 to $5.1 million in Q1 '18, including 10.7% of our distributions in units under our reinvestment program. Our distributable income for the quarter amounted $5.7 million or $0.117 per unit, compared to $4.1 million a year ago and also $0.117 per unit in Q1 '17. Our payout ratio for the quarter stood at 89.7% from 90.1% last year. Our FFO reached approximately $5.7 million for the quarter compared to $4.6 million last year, $0.118 per unit this quarter compared to $0.109 last year. The FFO payout ratio stood at 88.9 from 96.6 a year ago. Finally, our AFFO amounted $5.2 million, $0.108 per unit this quarter compared to $4.3 million and $0.10 last year, and the payout ratio is at 97.6% from 104.8% a year ago. Our balance sheet represents investment property at fair market value amounting $745 million compared to $751 million last December. We have the $3.8 million in cash and other assets amounted $13.4 million. We spent approximately $386,000 in recoverable and nonrecoverable CapEx during the quarter, and we spent $1.5 million in TIs to meet specific needs of our clients as well as commission [ agent ] brokers. Mortgage loans payable amounted $425 million at the end of March, and we're at $428 million at the end of December. Our mortgage loan to value ratio is now at 56.1% compared to 58% in March '17. We have 2 series of debenture for a net book value of $49.7 million. The Series E is now redeemable at their principal value. They mature only in March 2020, and for now, it's not our intention to redeem them. At the end of December, we're using $15.2 million on our 2 lines of credit. We used the net proceeds of our recent sales of property to reimburse, partially, our lines. We had the $55 million of mortgage loans coming to maturity in 2018, of which $19 million are already renewed at average rates approximately 80 basis points higher as those previously in place. That's all for my section, I'd like to thank you for your attention, and I'll turn back the conference to the facilitator for questions from analysts. Thank you.

[Operator]

[Operator Instructions] And your first question comes from the line of Fred Blondeau with Echelon Wealth Partners.

[Frederic Blondeau, MD & Head of Real Estate Research]

I got 3 questions. First, in terms of your recycling program, I think you mentioned 4 more properties left for sale. Am I correct?

[Michel Léonard, President, CEO & Trustee]

Well, we have -- we've put the Sherbrooke property for sale, but as far as the other properties that were slated for sale in 2017, what's left is Antonio-Barbeau, Harvey in Saguenay, Thetford Mines, 85 St-Charles in Longueuil and the Magog property.

[Frederic Blondeau, MD & Head of Real Estate Research]

Okay, so 6 properties. And can you remind us what dollar amount range these would represent approximately? And what would be your timeline here?

[Michel Léonard, President, CEO & Trustee]

Well, if we look at -- let's look at Harvey. Harvey is approximately -- I'll give you a range because I don't want to -- I can't divulge the price, given the fact...

[Frederic Blondeau, MD & Head of Real Estate Research]

Sure, no, but you can give me like an overall range for the 6 properties.

[Michel Léonard, President, CEO & Trustee]

Well, I don't mind giving you individual ranges, okay? So let's say, Harvey is between $4.5 million to $4.7 million. Thetford Mines, around $500,000. 85 St. Charles is a property that we put on the market, but if we don't -- it's 100% occupied, it's well located. If we don't get our price, we're just going to take it out of the market, remove it from the market. So and -- So I wouldn't -- like -- it -- so it's not like -- we'd like to sell it, but if it's -- if we don't get our price, definitely we won't. And then there's the Magog property, and I think the Magog property is in the ranges between $1.8 million to $2.2 million. What's interesting and what's happening in Magog is that we don't have interest regarding the purchase of this property, but it seems that there's accumulated or genuine interest to lease the property. So instead of doing a fire sale, perhaps what we would do -- will do is to wait until it is 70% leased thereabout, and then put it again on the market. So as far as timing is concerned, the St. Charles, I wouldn't count on this. The Magog property, for now, I wouldn't count on it. Antonio-Barbeau is in the same scenario as St. Charles. It's a decent property, we did a transformation. We invested money, it -- we increased the value of that property. And the difficulty for purchaser in this property, if you remember, Fred, this is a -- the property where we have a greenhouse on the roof, where they -- they're cultivating tomatoes and cucumbers and stuff like that. No pot yet, so -- but it would be a prime spot for it if ever the tenants were to leave because the greenhouse belongs to us. So again, the difficulty is for purchasers to see that this property has a greenhouse on the roof, and so they're scratching their heads, and it's a difficult thing to assimilate because it is not your typical industrial property, so -- and I recognize that, but I think that there's long-term value, especially regarding the cannabis-growing opportunity that could happen. So if ever our tenant, Lufa Farms, were to leave, I think it's a prime spot. So again, like somebody told me a long time ago, never fall in love with your investment. But in this case, I think that an investor would have to recognize the long-term value of this property in order to make a bid on it. So long answer, sorry. So Harvey and Thetford Mines, I think, that are going to be sold within the next 2 quarters and some or all of our Sherbrooke properties. And if you want us to give a number to the total Sherbrooke properties, $30 million thereabout. And so I think you've got the range of our activity for 2018.

[Frederic Blondeau, MD & Head of Real Estate Research]

That would be all for 2018, between 2 and 3 for sure, maybe more, right?

[Michel Léonard, President, CEO & Trustee]

Well, it looks like Harvey and Thetford Mines for sure. And from the feedback that I got is that all -- most -- let's say most, not to say all because I mean, 100% is always more difficult to achieve. But call it, 70% of our Sherbrooke properties would be sold this year at 70% value of $30 million.

[Frederic Blondeau, MD & Head of Real Estate Research]

Okay, perfect. And moving on to -- looks like Cominar will have more assets for sale but within the province of Québec this time. And I was wondering, without giving me too much detail, too many details, I was wondering if you have any of these assets on your radar this time? And I guess, what would be your strategy there or your visions or use there?

[Michel Léonard, President, CEO & Trustee]

Well, I understand that there are going to be 3 buckets, and there's one bucket in -- that we would be interested. It seems that there -- that they would put -- what I heard from the call yesterday, that there are certain properties in the west end of Montréal, that they would put in a bucket of $200 million. That would definitely pique our interest.

[Frederic Blondeau, MD & Head of Real Estate Research]

Okay, that's fair. And lastly, Benoit mentioned the same-property NOI was 0.1% for the quarter. And I guess we should expect that kind of range for the rest of the year, correct?

[Michel Léonard, President, CEO & Trustee]

Yes, yes, yes.

[Operator]

[Operator Instructions] And your next question comes from the line of Yash Sankpal with Laurentian Bank.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Just on your office portfolio, I saw that your NOI went up quarter-over-quarter by around $600,000, but if I look at your occupancy stats, they went down. So maybe I'm missing something. Could you explain what caused that increase? Was it the occupancy drop?

[Michel Léonard, President, CEO & Trustee]

The increase in the NOI? Well...

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Yes, in the office portfolio, just from Q4 2017.

[Benoît Cyr, VP & CFO]

Well, in the office segment, we went down from 85.2 to 84.9.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Right, but your occupancy -- sorry, your NOI has gone up, so just trying to understand what caused that increase in NOI.

[Benoît Cyr, VP & CFO]

Well, the occupancy is based on a -- on committed offer, the occupancy rate, so the effect on our numbers is not darkly -- it's not immediate. So it's probably the reason why you see a gap between the occupancy rate and the NOI produced.

[Operator]

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

[Michel Léonard, President, CEO & Trustee]

Well, thank you very much for joining us for this first quarter. As you can see, I think that the last quarter of 2017 was received in a lukewarm fashion and at that time, we did mention that we thought that in the acquisitions that we had concluded in November were going to show their strength in the first quarter of 2018, and I think that, that's exactly what had transpired. So most, if not, all our ratios, those that should go down, went down, and those that could go up, went up, and except for the occupancy, that was slightly down as compared to the first quarter of the 2017 but 2% down as far as the last quarter of 2017. So when we recognize and it's not -- given that it's an industrial lease of 90,000 square feet, it doesn't bear a lot of effect on our numbers for the remaining of the year. And given the fact that we have known as far as our budget exercise and so on, this was fully reflected in our numbers for 2018 and hence, was not a surprise. So I think that we're on the right course, as you can see, and we certainly believe that the AFFO ratios and FFO ratios are going to continue their movement, and so we're obviously managing the business in order to see these numbers going down each quarter during the year. So again, thank you very much for joining us. We appreciate your following. And any comment that you want to make off-line then, as always, we're available. Thank you very much.

[Operator]

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