BTB Real Estate Investment Trust

TSX:BTB.UN

Earnings Call Transcript

[Operator]

Good morning. My name is Sylvie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust's 2019 First Quarter Ended March 31, 2019, 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 its Annual Information Form, which were 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 the conference.

[Michel Léonard, President, CEO & Trustee]

Thank you very much. In the first quarter of 2019, we saw our occupancy rate increase from 89.3% to 91.7%. And that's as a result of more than 200,000 square feet of leases that were committed for future occupancy. At the -- as of the third quarter of 2019, we anticipate to generate an additional income of $525,000 or $0.01 per unit, specifically related to the conclusion of a lease with a new tenant to replace the bankrupt Pharmetics. We're carrying the Pharmetics bankruptcy still for the first and second quarter of 2019.Nuera, which is our new tenant for 130,000 square feet, has already begun the process of installing itself in the facility, and we anticipate that as of July 1, Nuera will begin paying rent and additional rent. The bankruptcy also contributed to a revenue shortfall, and additional expenses for the REIT of $375,000 or $0.007 for the first quarter as a result of the bankruptcy, where now we have to support real estate taxes and operating expenses for the property. As far as our prospects for certain properties that were purchased in 2018, the Ste-Catherine and Crescent property. When we purchased this property, we had an occupancy rate of 20%. Now we stand at 57%. We have good traction for the remainder of the ground floor space, and the ground floor is the space that is going to bring the most NOI for this property. We acquired on December 28, the Saint-Martin property. When we purchased, we had a 15% vacancy in total for both properties, and we're negotiating presently with tenants, and we surmise that we will bring our occupancy rate close to 95% this year. In Complexe Lebourgneuf - Phase I, we anticipate that at the next quarter as of June 30, we will show a 92% occupancy rate, which is going to be a record occupancy rate for this property since we purchased this property. The other dragging property was Complexe Lebourgneuf in Three Rivers. We concluded a small transaction, and there seems to be interest for this property within the market, a level of interest that we have yet to see. We significantly increased in the average net rental rate for our lease renewals, and we saw that percentage go up by 5.6%. And this will improve our income for the same property portfolio in the coming quarters. The same property NOI was negative as a result, again, of the Pharmetics situation and the buyout of the lease of Shire during 2018. We saw an increase in rental income by 1%, and that's despite a reduction of our total leasable area caused by a disposition of properties in the portfolio. Also, a significant decrease in our total debt ratio from 64% to 61% and our mortgage debt ratio from 56% to 54%. And this decrease, obviously, affects the results as we have not redeployed capital as a result of the decrease in our debt ratio, but we anticipate that this will free up several million dollars in leverage for future acquisition of accretive properties. We saw, obviously, a decline in certain key performance indicators, and Benoît will discuss fully those decreases. We have currently a very active pipeline for acquisitions given the amount of money that we could redeploy. And I'd like to discuss the recent acquisition of the industrial property located in Pitfield Boulevard. First thing is that this property was purchased at $11.85 million. The NOI in place is $870,000 and that is a -- represents a cap rate of 7.25% The property is leased to a company called SC360. They are the certified installer for Vidéotron, everything Vidéotron as far as TV and the network and so on. And they also work with the -- as installers for Bell and the like. Our lease is for guaranteed cash flow for 8 years -- for a term of 8 years. When we purchased this property, it was appraised by Altus at $13.6 million.One noteworthy factor regarding this acquisition is comparatively -- or almost comparatively with this acquisition with dispose of the Antonio Barbeau property. The Antonio Barbeau property was generating an NOI of $500,000 on -- yearly, $500,000. The reason that we sold this property that we anticipated that the property would suffer some vacancies in the next coming years. And as a result, we found the purchaser for proceeds of disposition of the $7.1 million. And that is -- we had equity of $3,900,000 in the property. So if we compared this to the NOI that is going to be generated from our purchase of the SC360 property, so as I mentioned, the NOI is $870,000 a year and the equity that we put in the property was $4 million. It is a good investment for BTB, as I mentioned earlier, 7.25% as cap rate. So if we try to balance the equity that we had in Antonio Barbeau at $3.9 million and the equity that we put in the Pittsfield property at $4 million, the ratio is roughly 97%. However, with a ratio of 97%, we are creating value on the NOI as a -- of roughly $357,000 on a yearly basis, and we created value by purchasing the property at $11.8 million compared to the disposition of $7.1 million. So we're creating value -- we created value with this purchase as compared to the disposition, both on the NOI and on the actual property valuation. So as I mentioned, we did dispose -- no, I didn't mention this. So we did -- during the quarter, we disposed the property located in the Delson. That property was anchored by a prodigal or Longueuil, and Longueuil had given us a notice that they would go dark, and we were able to find a buyer of the property for $22.5 million, we had to pay $21.5 million. And in light of the going dark of Longueuil that solved the problem, although we were able to profit from the sale. We -- in the course of negotiation, we negotiated a balance of sale of $6 million and the terms and conditions of the balances of sale will be presented to you by Benoît. On March, we disposed of a retail condominium that was located adjacent to the Delson property. So we have chosen not to remain a smaller owner in light of what was going on with the center in Delson. And the proceeds were $1.9 million. And so we generated, call it a profit, a very slight profit of $100,000. We did dispose, as I mentioned, of Antonio Barbeau. We acquired the SC360 property. And in summary, we are now 65 properties representing 5.3 million square feet. And with this, I would like to ask Benoît to delve into the details of our -- of this morning's presentation.

[Benoît Cyr, VP & CFO]

Thank you. Good morning, everyone. As mentioned, during this fourth quarter, we disposed 2 adjacent properties, both on Lebourgneuf Boulevard and Delson, Québec. Total selling price around $24.5 million. We've agreed for a balance of sale with a producer of $6 million at 7% interest rate and for a maximum of 5 years. Cost base of these 2 disposition around $24 million. At the end of March, our portfolio consisted of 65 properties representing close to 5.3 million square feet of regular area and having a market value of approximately $818 million. As mentioned 2-post quarter events: the sale of the Antonio Barbeau property for $7.1 million for a net proceed of $4 million after reimbursement of the mortgage loan and the acquisition of 65,000 square feet industrial building on Pitfield Boulevard in Montréal. We've replaced a $7 million property producing $0.5 million of NOI by a $12 million property, $870,000 of NOI by using the same equity. Before discussing our financial results in detail, I would like to get through some evidence and factors that occurred recently and has affected the first quarter earnings. First, bankruptcy of Pharmetics, it was discussed earlier by Michelle Léonard. Now this property is fully leased but the shortfall of revenue and additional operating costs during this quarter total amount of $375 or $0.007 per unit. Second, in 2018, we received a cancellation penalty of 75% of the residual amount payable by Shire under its lease on the Alfred Nobel property in Montréal. The lease buyout generated a nonrecurring income in 2018 but affects the result of this first quarter by approximately $225,000 or almost $0.004 per unit. We are experiencing strong activities in leasing, that's the vacant space, and we expect to resolve this situation over the next quarters. Third, as mentioned, we've acquired the Crescent/Ste-Catherine building with an occupancy rate of less than 20%. In October '18, we moved our head office into this property and proceeded to lease spaces to third parties. At the end of March, the in-place occupancy rate is close to 60%, and the vacancy causes a shortfall in revenues of approximately $225,000 or $0.006 per unit. Finally, we did the straight line rents receivable write-off of $319,000 following the renegotiation depreciation of an in-place lease. This write-off affects our earning and some of our indicators by $0.006 per unit. These 4 factors create a shortfall of $1,250,000 in the quarter or $0.022 per unit. We would also note, the previous financial, that we've leased more than 200,000 square feet for occupancy schedule for later this year. We anticipate those leases will generate additional income of $525,000 for the third quarter and $635,000 for the fourth quarter. Revenues generating from these leases will improve the current situation by more than $0.01 per unit for the third quarter and $0.011 per unit for the fourth quarter. Also, we see a significant decrease, as mentioned, in our debt ratio. And therefore, a financial leverage of several million dollars is available to redeploy capital. This dormant capital may be used to purchase accretive properties and bring additional contribution to improve performance indicators. Finally, we have not yet fully redeployed the capital from sale of property closed during the last few quarters. We still have $4 million in surplus of cash and $4 million available in -- on our acquisition facility and for a total of $8 million available to invest in our acquiring accretive properties, without having to issue additional equity. So for the first quarter, rental revenues were up 1% or $200,000 compared to the same in 2018. We've recorded an increase in our operating expenses of 6% or $0.6 million between the first quarter '18 and the first quarter of '19. Our NOI is down 3.5% for the quarter compared to the same in 2018, and it is at 51.1% at percentage of revenues. Acquisitions completed during the last 4 quarters contributed to an increase of our NOI by $1.5 million. while the shortfall from disposals completed during the same period is estimated at $1.0 million. Increases in operating expenses of the same-property portfolio explained the decrease of our NOI. Financial expenses are up from $4.9 million to $7.9 million. We have accounted a fair-value adjustment of a total of $1.9 million of our -- on our swap and on Class B LP units at the end of March. This adjustment of value is recorded as an increase of financial expenses and is due to lower interest rate in Canada and to the increase in value of our LP units. This noncash item explains most of the financial expense increase. Our average-weighted contractual rate of interest on mortgage loans is now at 3.97%, 17 basis points higher as of the end of Q1 '18. The weighted average term of our mortgage loan portfolio is 5 years and 2 months. Our Trust administrative expenses are at $1.1 million, approximately the same as in Q1 '18. We've also accounted $215,000 for our unit-based compensation plan. To appraise our portfolio, at the end of each quarter, we use cap rates provided by external evaluators. We had estimated that the value of the real estate 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 is 6.6% at the end of March, '19 compared to 7.1% (sic) [ 7.4% ] a year ago. We've present the net income of $1.4 million for the quarter, $0.025 per unit compared to $6.6 million in Q1 '18 or $0.135 per unit. The same-property portfolio for the quarter shows a small decrease of 0.7% in its revenue and a decrease of 4.3% in its NOI. The bankruptcy of Pharmetics whose premises have since been fully re-leased as of the next July and the buyback of Shire's lease in the Technoparc Saint-Laurent are the other 2 most important factors explaining an income shortfall of approximately $415,000 for this quarter and the decrease in the same-property portfolio indicators. If not for these 2 factors, the same-property portfolio would have posted a 1.6% increase in rental income, and the NOI would have been stable. Our distribution increase from $5.1 million in Q1 '18 to $5.9 million in Q1 '19, including 11.6% of our distribution in unit under our growth. Our distributable income for the quarter amounted $5.3 million or $0.094 per unit compared to $5.7 million and $0.117 per unit in Q1 '18. Our distribution payout ratio for the quarter stood at 111.6% from 89.7% in 2018.Our recurring FFO reached approximately $4.7 million for the quarter compared to $5.7 million a year ago, $0.084 per unit this year and $0.118 last year. Finally, our recurring AFFO amounted $4.6 million, $0.083 per unit for this quarter compared to $5.2 million and $0.108 last year. Our balance sheet present investment property at fair market value amounting $818 million compared to $839 million last December and $745 million in March '18. We had $4.8 million in cash. The balance of sale of receivable of $6 million at an interest rate of 7% and other assets amounted $13.4 million. We spent, during the quarter, approximately $318,000 in recoverable and nonrecoverable CapEx, and we spent about $618,000 in TI to the specific needs of our clients as well as commissions to brokers. Mortgage loans payable amounted $453 million at the end of March, and we're at $471 million in December and $425 million a year ago. Our mortgage loan-to-value ratio is now at 40 -- 54.3% compared to 55.8% in last December and 56.1% in last March. We have 2 series of debentures outstanding for a net book value of 407 -- sorry, $49.7 million. The Series E is redeemable at their principal-backed amount. They mature only in March 2020. And for now, it's not our intention to redeem them before their maturity. At the end of March, we were using $15 million on our acquisition line of credit and our operation line was unused. We had $55 million of mortgage coming to maturity in the rest of 2019. As of today, $26 million have already been renewed and [indiscernible] rate and a $3 million loan has been reimbursed. That's all for my section. I would like to conclude your attention, and I now turn back the conference to the facilitator for questions from analysts.

[Operator]

[Operator Instructions] And your first question will be from Yash Sankpal of Laurentian Bank.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

I just want to focus on the straight-line write-off. Which lease was it and what caused the drop?

[Benoît Cyr, VP & CFO]

Was -- it was in [ Caisse de dépôt ] building where a new tenant take this space in place of the past one, and it was a -- we ask you -- and they renegotiated the lease in place, and we asked to write out the straight-line assets that we have now on our balance sheet.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

So was it a new lease? Or like I'm just trying to understand, was it existing lease that was adjusted down?

[Michel Léonard, President, CEO & Trustee]

The -- if I may -- the tenant that we had for this property was called Group SM, The SM Group. And SM Group was sold to a company called FIMX, and this company assume -- did not assume the lease. We had to put a new lease in place with this group. So the new lease was under the same terms and conditions. However, there was -- we had to do this $319 write-off as a result of it being a new lease. So it's not -- so the building is fully occupied. It's the same people that are in the property, but the sale of the business was not concluded on the basis of the sale of shares, it was basis of sale of assets. And hence, we had to conclude a new lease with the purchasing entity.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Would there be an NOI impact because of this?

[Michel Léonard, President, CEO & Trustee]

This is just -- it's a onetime impact.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

No, no. Your real rent that you'll be getting from the tenant won't be changed, right?

[Michel Léonard, President, CEO & Trustee]

It's the same net rent. It's just that we had accumulated this depreciation, and by the -- because of the fact we have a new lease, we have to write off whatever company in the past lease. It's just -- it's nonevent in the sense that it's not really money out.

[Benoît Cyr, VP & CFO]

It's a noncash situation.

[Michel Léonard, President, CEO & Trustee]

Just IFRS principals.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Got it. And this $375,000 shortfall due to the Pharmetics lease. I'm trying to understand why the shortfall is impacting now at this point? Because the lease was -- the bankruptcy was announced last year.

[Michel Léonard, President, CEO & Trustee]

Because we have -- we don't have the income anymore. And we're only going to generate income as of the 1st of July. So the lease is in place with the new tenant, but the new tenant only pays us as of the first of July. So we have to assume all operating expenses for the property, for instance, snow and rain during the winter, electricity and real estate factors. So we're assuming the -- for the month of January to June, and we have obviously a shortfall on revenues because we're not generating net rent for the property until the 1st of July.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Got it. Okay. So is it the same case for the Crescent property? The...

[Michel Léonard, President, CEO & Trustee]

The Crescent property is different because when we purchased the property, we knew that we had a vacancy, and we knew in order for this transaction to be accretive, we had to leave the space rapidly -- the empty space rapidly. So we moved into the property in October of 2018. We already leased part of the ground floor to a company called [ Guy Boutin ]. It's 1,500 square feet. They're paying $75 net square foot for stock that is right next to the main entrance of the office building, and we have a tenant and occupancy, which is [indiscernible] that we're -- and we're there when we purchased. And we have the remainder of the ground floor, which is a space of roughly 2,500 square feet, we're -- right now, we're negotiating with 2 tenants, and the negotiations for the 2 tenants are for the first offer. I'll talk about the offers, not where we think we're going to end up. But the offers are at between $150 of square foot net to $175 of square foot net. So one is for premier tenant, the other one, let's call, it a lesser tenant than the premier tenant. So we're just -- we're waiting on this fact, and we're very confident that the whole ground floor is going to be leased before, let's say, September 30. So it's a great turnaround, and it is a property that we thought we were able to -- we will be able to turn it around rapidly. So it take us less than a year. The other aspect, also, is that when we moved in, there were -- there was only one occupant on our fifth floor. Now the whole of the fifth floor is almost all leased, and there's a space on the fourth floor right next to our space that is -- that remains vacant, and that we may lease it or eventually keep it for our own expansion as BTB grows. So as far as the office state is concerned in this property, it's only the second floor that has remained vacant, and we purposely kept it vacant because a lot of the retailers on Ste-Catherine Street are operating stores and 2 floors. So given that the rental -- the net rental rates for the ground floor is very expensive for -- on Ste-Catherine Street, a lot of retailers are averaging down their cost of rent by taking some spaces on second floors. So we kept our second floor vacant purposely, but now it seems that the tenants that we're seeking to don't need the second floor. So we're going to turn it back to the market and lease it as an office floor.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Thanks for the color, but my question was you talked about that the property had a shortfall. So if you bought the property without any material occupancy, why is it causing you a shortfall when it is half-leased? Is it because of taxes or CAM? Like, what is it?

[Michel Léonard, President, CEO & Trustee]

Yes. It's because the NOI that is generated by the property is causing us a shortfall versus the anticipated NOI that the property would be generated -- that will generate. So that's -- it's just -- it's noncash in the sense that it is what it is...

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Okay. Got it. Okay.

[Michel Léonard, President, CEO & Trustee]

It's just an expression of -- to show that when we lease that space or the vacant spaces, that we believe that there's going to be an additional amount of NOI that is, obviously, going to be generated from these leases.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Got it. I thought it was actual cash shortfall. But I got your point.

[Michel Léonard, President, CEO & Trustee]

No, no, no. Not at all.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Okay. And just lastly, about this vendor take-back, is that take-back before the actual sales proceeds or after the proceeds? So I'm trying to understand if you received actual cash.

[Michel Léonard, President, CEO & Trustee]

So I don't have the exact -- maybe Benoît has the exact numbers. We sold the property for $22.5 million. So $22.5 million minus $6 million is $16.5 million. We had a mortgage of roughly $12 million on the property. So don't quote me on the amount of the mortgage, but roughly $12 million. So the net amount that came into the bank account was roughly $4 million from that sale. And the balance of sale, as Benoît mentioned, is for 5 years: the first 3 years are 7%.; the fourth year is at 7.5%; and the last year is at 8%, the interest rate.

[Operator]

[Operator Instructions] And currently, gentlemen, we have no other questions registered. So I would like to turn the call back over to you.

[Michel Léonard, President, CEO & Trustee]

All right. Well, thank you very much for participating in our conference call this morning. We -- as we mentioned in [indiscernible] event, I'm talking about Pharmetics and talking about Shire. But we are very confident that after the second quarter of this year, these events are going to be past us, and we'll be back in -- with an AFFO that is definitely going to be under 100%. So that's our goal. We are striving, working hard in order to attain our goals, and that's our only focus. So again, thank you very much for participating in in the call this morning, and we'll see you in the next conference call.

[Operator]

Thank you. This does conclude today's conference. You may now disconnect your lines.