BTB Real Estate Investment Trust

TSX:BTB.UN

Earnings Call Transcript

[Operator]

Good morning. My name is Anas, 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 2021 Second Quarter Conference Call for which management will discuss the quarter ended June 30, 2021. [Operator Instructions] 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. [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. A number of 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 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 Leonard, President and Chief Executive Officer; and Mr. Mathieu Bolte, Vice President and Chief Financial Officer. Mr. Leonard, you may begin your conference.

[Michel Leonard, President, CEO & Not Independent Trustee]

Thank you very much. Welcome to our conference where we're pleased to announce our Q2 results. We finished the quarter with 5.4 million square feet, an increase of roughly 100,000 square feet versus the first quarter of the year, and the total value of our investment property is CAD 922 million, where we're approaching the mark of CAD 1 billion of assets shortly.We have concluded renewals and new leases. Our leasing activity of 175,000 square feet with an 86.2% renewal rate and our committed occupancy is at 92.2%, an increase of 1.2% versus the previous quarter. We collected 98.4% of our rent, and our total debt ratio is down 2.9% as compared to the first quarter of 2021. Our FFO per unit stood at CAD 0.125. And excluding revenues -- unanticipated revenues or additional revenues for the quarter, we would have been at CAD 0.106. Our year-to-date AFFO payout ratio stood at 73%, which is down 50% compared to Q2 of 2020.We definitely are seeing an improved financial results and stability across all our operating segments. The industrial segment has outperformed during the year, but the fundamentals of the suburban office and the food anchored retail properties do remain very strong. The negative [ being ], we have not recorded nor are we experiencing any impact regarding COVID-19 in Q2 2021, and that demonstrates a return to prepandemic level of operation. We did receive all our payments in our deferral compensation -- rent deferral agreements, and we're quite pleased with the way that BTB has handled this pandemic.As I mentioned earlier, our leasing activity was extremely active with 175,000 square feet, which includes 97,000 square feet of leases that were renewed and 78,000 square feet of concluded new leases, and we were able to secure a new tenant to replace 85% of the space left vacant by the departure of Sportium in Q1 2021. So this was a lease with Princess Auto concluded recently during the quarter, and the tenant is going to take occupancy for construction purposes in September 2021.We do experience good leasing interest in the retail and office segment. Our occupancy rate stood at 92.2%, up by 1.2% compared to the previous quarter. We did close a CAD 31 million bought deal that includes the exercise of the over-allotment. Also, we did receive a visa for final short form base shelf prospective valid for a period of 25 months for total proceeds of up to CAD 20 million. We do have $40 million available for acquisitions that would be cash for acquisitions. That includes access to credit facilities, and therefore, we can acquire, without tapping the public markets, approximately, CAD 115 million of assets. We saw our same-property NOI growth by 3.3%. The 3.3% is adjusted to reflect the CAD 1.6 million of additional revenues. And we haven't done or reviewed our IFRS valuation. And therefore, there's just no adjustment in that provision.Back to the leasing and renewal activity. Our Q2 renewal rate was 86.2%. The average lease term for BTB regarding the new leases is 6.5 years. We were active as well not only in Q2 renewals for 2021 at 82 -- almost 83,000 square feet. But during the quarter, we also touched upon 14,000 square feet of lease renewals that occurred in 2022 and after. Therefore, 175,000 square feet of leases were renewed or new leases were concluded. And what's noteworthy is that 53,000 square feet of renewals were concluded with tenants leasing office space, and that shows us a trend for businesses to go back to their office setting.We do proactively manage lease expirations, as I mentioned, because we did renew leases that for expirations that occurred or will occur in 2022 and thereafter, and that's 14,000 square feet for Q2 and 68,000 square feet to date this year for leases maturing next year and thereafter. And our renewals and new leases were concluded with tenants operating in various industries, whether or not they were impacted by COVID pandemic, and that includes governmental necessity-based tenants, essential and professional services.If we go by operating segment, we concluded 53,000 square feet of lease renewals in the office segment, 13,000 square feet in the retail segment, and 30,000 square feet in the industrial segment. We leased vacant space to new tenants for almost 25,000 square feet in the office segment, 41,000 square feet in the retail segment, and 13,000 square feet in the industrial segment, hence, a total of 78,000 square feet leased in those segments. And in average, the lease renewal rates went down by 1.7% in the office sector, an increase of 5.1% in the retail sector, and 6.1% in the industrial sector. And the decrease in the office sector is mainly caused by a substantial lease that was negotiated in Q1 with Desjardins, one of our tenants, that saw a rent reduction.The key events we saw in the office portfolio were mainly composed of suburban office properties. Their performance has been supported by the quality of its tenants and the top 2 tenants are the federal and provincial government agencies. In the retail, regarding the occupancy, we saw a reduction of 2.7%, and that was as a result of the departure of a tenant at the end of 2020 that occupied 30,000 square feet in Saint-Bruno that I discussed earlier, and this was a tenant that we did not wish to renew the lease, and also impacted by the departure of Sportium, as I mentioned earlier, where we have re-leased that space, or 85% of that space, to Princess Auto. The industrial segment saw an increase of 2.9%, mainly caused by the property that we acquired in June 2021, combined with various new leases that were signed.By geographic sector, Montreal represents 51% of our NOI, Quebec City, 32% of our NOI, and Ottawa 16%. We were able to renew leases for the Greater Montreal area of 24,000 square feet during the quarter, 25,000 square feet in Quebec City, and 47,000 square feet in Ottawa. Concluded new leases in Montreal for almost 56,000 square feet, in Quebec City 8,000 square feet, and in Ottawa 14,000 square feet, at an increased average renewal rate of 3.3% in Montreal, 4.7% in Quebec City, and 1.5% in Ottawa. So the representation of our properties, 20% of our portfolio is located in Ottawa, 26% is located in Quebec City, and 54% is located in the Greater Montreal area.With this, I'd like to pass on the presentation to Mathieu, who is going to delve into the details of our financial performance.

[Mathieu Bolte, VP & CFO]

Thank you, Michel. Good morning, everyone. As Michel mentioned, it's important to note that we don't have negative impact of the COVID for this quarter results. So it demonstrated a return of the operation to prepandemic level. The economy in Quebec is on a good path of recovery and the vaccination rate is on the right track, so it helps the overall confidence.During the quarter, we recorded a CAD 1.4 million net revenue onetime adjustment to reflect additional recoveries from prior years. Just to give a bit of context, since the beginning of the year, we engaged in a project to automate the 13th invoice process and the objective was to increase the efficiency and the preciseness of the operating expenses chargeback. So again, we'll show the impact on revenue, NOI, FFO, and AFFO, excluding this onetime item, just to make sure we have the right comparison.For the operating revenues and NOI, so we show a 12.9% revenue increase in Q2 2021 compared to last year. By adjusting Q2 2020 with the COVID impact of last year and by adjusting this quarter for the onetime recoveries, the revenue growth was 3.4%, supported by the leasing activity. From an NOI standpoint, we show an increase of 25.4%. So again, excluding the onetime items for both years, NOI was up by 10.1%. So we saw savings on school taxes, productivity on energy costs, and the leasing activity has contributed to the increase. Same-property NOI margin was 59.7% for Q2 this year, up by 5.5% compared to last year.One thing to mention as well, the positive impact on revenue and NOI from the recent acquisition that we did in June, we'll see the impact this coming quarter, so in Q3 2021. It is a triple net lease, and this will generate about CAD 400,000 of NOI for the last 6 months of this year. For the FFO, AFFO, so the recurring FFO per unit was CAD 0.125. So it's up by CAD 0.05 or 68% compared to last year. By adjusting Q2 2020, again, with the COVID impact and by adjusting this quarter for the onetime recoveries, the adjusted FFO for this quarter would be CAD 0.016 per unit compared to CAD 0.10 per unit for last year, so it's an improvement of 6% on a more comparable basis. The recurring AFFO payout ratio was 64% compared to 127% for the same period last year, so it's an improvement of almost 63% for the payout ratio.Looking at the capital structure. The weighted average interest rate for mortgages was 3.52% compared to 3.75% for the same quarter last year. So this is a decrease of 23 basis points. This is due to the recent mortgage refinancing. So just to give perspective on an annual basis, this represents a saving of CAD 1.2 million. The debt ratio has improved by 2.9% since the last quarter, and it is now at 56%. Following the equity issuance of April this year, the trust has repaid in full the line of credit, and from the CAD 16 million that was left, CAD 5 million has been used to purchase the property at the end of June. We also saw a fair number of conversions following the Series H debenture that we issued last year in September. This has also contributed to improve the debt ratio. We should continue to see additional conversions, and this will help us to bring down further our debt ratio. Since the issuance of this debenture, 20% has been converted.Finally, looking at the debt maturities. So our refinancing commitments for the last 6 months of the year totaled CAD 83 million, of which now in August CAD 24 million has already been completed, and the remaining CAD 59 million is progressing well. In addition, CAD 14 million of mortgages with maturities after 2021 have been refinanced just to take advantage as well of the rates, have been refinanced in the second quarter, and we've been able to get an additional CAD 60 million of cash from the top up.So this completes our presentation. And with that, we'll move to the Q&A.

[Operator]

[Operator Instructions] Your first question comes from Matt Kornack with National Bank.

[Matt Kornack, Analyst]

Just wanted to quickly touch on the acquisition environment. It sounds like you have some capacity to deploy. What are you seeing on that front? Obviously, we've heard some public names, one based in Quebec, and then I think Nexus as well talking about potentially reducing some asset exposure outside of industrial properties. Wondering if you're looking at those or other opportunities and what the acquisition environment looks like more generally.

[Michel Leonard, President, CEO & Not Independent Trustee]

Well, Matt, we are in the market in order to acquire properties. As I mentioned earlier, we estimate that we can acquire roughly CAD 115 million, CAD 120 million of assets without tapping the markets. And obviously, with the cash on hand and the facilities that are available, this is definitely something that we're looking at. We have signed letters of intent in order to look at certain acquisitions. One is in due diligence. We haven't -- as you mentioned, Nexus has decided or their profile is to acquire more or less in the industrial segment only. We have spent the last 4 months in preparing an acquisition -- a decision as to where we are going to concentrate our acquisitions. There has been no decision regarding our path. We are still very confident in the office sector, confidence in the industrial sector. And because we don't have enclosed malls, as you know, and we're basically grocery-anchored or necessity-based retailers that we do have in our portfolio, we haven't seen any pandemic effect on our portfolio. So the portfolio has come out of the pandemic as being very robust, as you saw on our collection numbers. But we are definitely looking at whether we're going to concentrate within a segment or 2 segments, and we should basically finalize our decision in the fall. So right now, we're looking at -- the properties that we're looking at are industrial properties and office properties. We have not looked at any retail acquisitions since the beginning of the pandemic.

[Matt Kornack, Analyst]

And with regards to office, I mean, there's actually been some transaction activity in Downtown Montreal. I mean maybe you can speak to the suburban market as well, but pricing doesn't necessarily look like it's been cheap. If anything, to the contrary. But just some thoughts there as to whether you're seeing any kind of availability or pricing dislocations as a result of what's gone on in the office market.

[Michel Leonard, President, CEO & Not Independent Trustee]

Well, in the suburban office market, and that's -- as you know, this is where we're concentrated. We haven't seen any increase in cap rates, although we all remember last year, how can we forget, where people were basically contemplating the fact that cap rates were going to go to 9%, 10%, whatever. And on the contrary, the acquisitions that we're looking at are definitely not at higher cap rates than the cap rates that we acquired in the past. So we haven't seen a movement towards increasing in these cap rates. And there's -- BTB also, as part of this mission, is basically experiencing a flight to quality. So as a result of going towards better position or better class assets, it does have a higher price tag as buying B or C type properties. So we're definitely -- part of our acquisition plan is a flight to quality. You've experienced all the divestitures that we did over the last few years where the properties that didn't cut the mustard were disposed of. And so now we've done our dispositions. The properties that we did want to dispose have been disposed of. And now we're basically redeploying our capital.

[Matt Kornack, Analyst]

That makes sense. And then on leasing, it looks like occupancy is trending in the right direction. Adjusted for kind of an early lease renewal, your spreads are pretty strong in all segments. Can you speak to kind of the remainder of 2021 and your 2022 lease maturities, anything of note there? And would you expect the trends that we've seen so far to continue? And also, any update as to currently vacant space where there's prospects for future occupancy?

[Michel Leonard, President, CEO & Not Independent Trustee]

The large spaces -- I'll start with the prospects first. We have prospects for our large vacancies. So we have a large vacancy in the same center where Sportium was located. And if all goes well, we should be going back to 90-some percent occupancy in that building. We have a substantial vacancy in our property that we own jointly 50%. That's 26,000 square feet. We're in counter, counter, counter, counter, I don't know how many counter LOI documentation that were produced. But hopefully, we're at the last effort on closing a transaction for that space. We don't have a lot of action in Three Rivers. And Three Rivers is basically when we look at our statistics, Three Rivers is occupied just slightly more than 60%. We have great tendency in this property. However, it's very difficult to attract tenants in Three Rivers, per se. I don't think that it has to do with our property itself. I think that it has to do with that market. And that is really bringing our office occupancy down because it's like just a little bit north of 60%. And it's definitely not helping our statistics. If you look at it. But if we were to take out the statistics, it's lumped into our Quebec City portfolio. And if we were to take out the Three Rivers property from the statistics, the Quebec City portfolio would show an occupancy level of almost 93%. Then we have -- in Saint-Bruno, we have that famous 30,000 square foot self-standing property that used to be occupied by a company called Surplus, and they sold Surplus Furniture. And so that's the lease that we didn't want to renew because it didn't bode well for the center. And regarding that, we are discussing leasing, but nothing concrete on that 30,000 square feet. Then regarding 2022, one of the substantial vacancy or lease renewal is with Walmart. And Walmart has voiced their intent on renewing that lease. We haven't concluded it yet, but it's part of an ongoing discussion that we think that we should finalize in the month of September. And that's 153,000 square feet out of, I think it's roughly 400,000 square feet. So that would be the substantial lease. And our chances of renewal are, I would say, at this point, are better than 85%. And that would be our leasing activity next year as we have roughly 15% of leases expiring of which Walmart is a good chunk, and they're probably listening on the call right now.

[Matt Kornack, Analyst]

On the Trois-Rivieres asset, is that something that you'd potentially think of selling? Or is it -- I guess you'd have to lease it first? Or would you sell it maybe to an end user?

[Michel Leonard, President, CEO & Not Independent Trustee]

We're open to all situations. So if somebody were to want to purchase this property, we would sell it. It would need somebody that is better attuned to that market and closer to -- when I say better attuned, I'd say closer. So somebody probably local would do a much better job than we have done over the years.

[Operator]

[Operator Instructions] Your next question comes from Yash Sankpal with Laurentian Bank.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

So just on the Walmart lease, did you say that you are very close to leasing, or did you say 85% chance of renewal?

[Michel Leonard, President, CEO & Not Independent Trustee]

It's 85% chance of renewal because nothing is certain in life. But all the signals that we're seeing are extremely positive. But I wouldn't want to tell you 100% certainty because, as you know, things change.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

Right, yes. No, I just wanted to make it -- okay.

[Michel Leonard, President, CEO & Not Independent Trustee]

Just to give you some color on the store, it's one of -- I wouldn't say one -- it could be seen as a top 10 performing store in the province of Quebec. So given its performance, I doubt that we would be faced with a nonrenewal.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

Okay. That's good to know. You've talked about your acquisition strategy. Would you consider going into another market in search of growth? Is that part of your strategic discussion?

[Michel Leonard, President, CEO & Not Independent Trustee]

Absolutely. Yes. Everything is open. There's no -- Yash, there's never been a reason for BTB to be perceived as Quebec-based. We've always said that we want to move west. We've always said that we were open to opportunities. But when we do have opportunities to tap into a new market, we have to see that there is a potential to create a critical mass within this market. So we wouldn't go, let's say, into Timmins, if we would buy only one property in Timmins. I think that that would not be sound as a plan for us. So if we go into a market, we have to see that we can accumulate critical mass in order to have boots on the ground in order to manage these acquisitions. So obviously, you start the process with you acquire a few properties at a time, and then you create your own critical mass, and then you have boots on the ground. Obviously, that's the process, but we have to be satisfied that the market is going to be strong enough to support us into creating this critical mass that I'm talking about. So there's never been any restriction by saying we're buying only in Quebec, we're buying only in Ottawa, but it was just a question for us initially of accretion on transactions. So we knew that it was difficult to buy in suburban Toronto, for instance, because the cap rates were high -- sorry, the cap rates were low, and we couldn't pay that higher price as a result of the accretion. Now given our cost of capital that's going down and hopefully the market is going to perceive that our results are sustainable and have been sustainable for the last 4 quarters in the sense that, yes, we did prepare the market and we showed to the market that if we adjust the numbers, given COVID and so on, we were at CAD 0.10, CAD 0.102 or whatever. And now we're basically coming out of COVID and we're at CAD 0.106 if we take out the one revenue item. So it's like we're definitely on a strong path. The numbers prove it. And now we're ready to just open our eyes and look at the different markets in Canada and do diversify BTB on a Canadian-based possibility.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

So when you say west, do you mean up to West Coast or just west of Quebec?

[Michel Leonard, President, CEO & Not Independent Trustee]

We're just open. We don't want to restrict ourselves and say, no, we don't want to acquire in Victoria. That's not the -- the goal is not that. The goal is to look at a certain market and say, yes, we want to commit to that market. And once we commit then, it means that we're going to acquire a substantial chunk of properties within that market.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

The office portfolio, what is the current utilization rate in your office portfolio? And how has it trended since the beginning of the year? And where do you see it going?

[Michel Leonard, President, CEO & Not Independent Trustee]

We haven't -- I'm going to be facetious. We haven't posted a guard at the entrance of our properties with a clicker basically checking who is coming in and who's not. But what we're seeing basically is that by the use of utilities, we're seeing the use of utilities going up. We're seeing the parking lots being full. So if you look outside an office building in a suburban environment and you see that the parking lot is full, it means that your occupancy level is probably very good. And that's what we're seeing, whether it's in Quebec City, whether it's suburban Montreal, whether it's Ottawa. Ottawa, the only issue there is there are 2 buildings that you know of that are leased 100% to the federal government, and the federal government has not yet asked or require their employees to go back to work physically within their office space. So those parking lots are generally empty. But the federal government in those 2 cases are under leases that I think run for another 7 or 9 years. So I'm not too concerned about that.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

Are any of your tenants asking or requesting any modifications to the existing setup?

[Michel Leonard, President, CEO & Not Independent Trustee]

No, none.

[Operator]

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

[Michel Leonard, President, CEO & Not Independent Trustee]

Well, thank you very much for joining our call today. We're very pleased with our results. These were results that we did anticipate, as I mentioned in response to a question, for a few quarters already. We knew that. And obviously, it was difficult to ascertain and comprehend as a result of COVID and COVID this, COVID that, a charge on our -- a reduction in our IFRS value then, and the certain charge and leases that were coming to maturity that were renewed for a year and so on. So yes, we were extremely busy, but we saw that our numbers were strong. And now we're demonstrating the strength of these numbers in this quarter. And we do not anticipate anything that would be different for the rest of the year. So I thank you very much for joining us, and we'll see you or see you or hear from you in our presentation for the next quarter. Thank you very much.

[Operator]

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