BTB Real Estate Investment Trust

TSX:BTB.UN

Q2-2025 Earnings Call

[Operator]

Good morning. My name is Joelle, 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 2025 Second Quarter Results Conference Call for which management will discuss the quarter ended June 30, 2025. [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/investors/presentations#quarterly-meeting-presentation.

[Operator Instructions] Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve numerous factors and assumptions and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Several important factors could cause BTB Real Estate Investment Trust's actual results to differ materially from the expectations expressed or implied by such forward-looking statements. These risks, uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust management discussion and analysts -- and in its annual information form, which were filed on SEDAR+ and on BTB's website at www.btbreit.com/investors/reports.

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, accompanied by Mr. Marc-Andre Lefebvre, Vice President and Chief Financial Officer; Ms. Stephanie Leonard, Senior Director of Leasing; and Mr. Charles Dorais Bédard, Senior Director of Finance. Mr. Leonard, you may begin the conference.

[Michel Léonard, executive]

Thank you very much, and good morning, everybody. We have -- as stated, we have provided a presentation that is filed on our website. So the quarter at a glance is very -- it's a simple quarter where there was relatively no investment activity, densification, no change as far as what we had reported in the last quarter.

On the ESG front, we did release our second ESG report outlining our sustainability activities for the year 2024, and the full report is available on our website. Regarding our dispositions, we did speak about during Q1 that we had initiated the disposition of a strategic portfolio in Saint-Jean-sur-Richelieu, including the property located at 145 Saint-Joseph Boulevard, 315 MacDonald Street and 1,000 Séminaire Boulevard, North, that's called Les Galeries Richelieu. We did receive LOI for some and all of the properties, and we are now in discussion with the offerors in order to see where this process is going to lead us to.

On June 16, we disposed of a small industrial property located in Saskatoon for $6.1 million, recording a profit on the sale versus the fair market value of the property. This property was on the market for leasing. And unfortunately, we did not have tenants that were interested in this property. However, we had a good number of investor users that were interested in the property. So at one point, we made the decision to sell the property.

After the quarter, we did dispose of the property located at 1170 Lebourgneuf Boulevard in Quebec City for $10.5 million as we had previously disclosed. Regarding our real estate portfolio, the portfolio for now is relatively stable. Our office in 2021, the office segment was at 47%. We're down to 42%. The necessity-based retail was at 30%. We're now at 22%. And the industrial went up from 23% to 36%. As far as our geographical diversification, 21% of our properties are located in Quebec City, 51% -- sorry, 54% in Montreal, 2% in Trois-Rivières, 13% in Ottawa, 3% Saskatoon and 7% Edmonton.

Regarding our key metrics, we still stand at 6.1 million square feet. The value -- the fair value of our investment property, $1.2 billion. Regarding our activity in lease renewals and lease -- conclusion of new leases, it's totaling 172,000 square feet and the average rent renewal rate was 4.7%. Our occupancy rate stands at 91.2%. And if we take into account the disposition of the property in Quebec City after the end of the quarter, our occupancy rate would have been 92%.

The main event of the quarter is really the NOI and the rental revenue that were affected by a noncash straight-line adjustment caused by the lease of Lion Electric. And Marc-Andre is going to go through the details of the noncash adjustment that was made regarding this.

We did conclude a lease for 2 years with the new investors in Lion Electric that provides a cancellation right after 6 months with 3 months' notice. So the minimum term is 9 months, and this is a right that we have requested in order for us -- to give us time to find a new tenant for the property. There was a reduction in rent that was initially at $12 a square foot or a little bit more than $12 a square foot to approximately $7.50 per square foot, still a triple net lease.

The payout ratio, again, on an AFFO basis at 75.8% for the first 6 months of the year, and we did see a reduction in our debt ratio.

With this, I'd like to ask Stephanie to take you through our leasing and our lease renewal activity.

[Stephanie Leonard, executive]

All right. Good morning, everyone. Just a reminder for those of you following us on our presentation online, we're currently at Page 8. So as Michel mentioned, our total leasing activity, which is the combination of new leases and lease renewals totaled roughly 170 -- let me round up here, 173,000 square feet for the quarter, of which approximately 50,000 square feet were new lease transactions, again, rounding up.

In terms of our noteworthy lease transaction, we concluded a new long-term lease with XCMG Canada Limited in one of our properties located in Edmonton, representing 30,297 square feet. So this transaction is actually already recorded in place and was the result of the swift replacement of a tenant who was in default of their lease obligations, and we relet the property to a new company. So there was no downtime between the tenancy. So therefore, the impact that you see in our occupancy rate for our Edmonton portfolio, I'll touch base on that in a couple of minutes, but it was not caused by this property.

In terms of our occupancy rate, our committed occupancy rate at the end of the quarter stood at 91.2%, a 340 basis point decrease compared to Q2 2024 or 130 basis point decrease compared to the previous quarter. So this decrease is primarily attributable to 3 events. So the first event, we're still carrying the effect of the industrial bankruptcy, which we reported in Q3 2024. This represents 132,000 square feet and it accounts for 220 basis points or a 2.2% impact on our occupancy rate. So just a note regarding the leasing velocity for the property. So the building is still showing for lease. We had great transaction at the end -- traction -- sorry, at the end of the first quarter. But unfortunately, due to zoning constraints, we were able to proceed with our prospects. However, we're continuing discussions with a couple of prospects that we have right now, different options that we're looking at for a full tenancy as well as single user as well as multi-tenancy options.

The second event that impacted our occupancy rate for the quarter in addition to impacting our lease renewal rates is one of our tenants in our industrial segment and more specifically touching our Edmonton portfolio. So we had a tenant that occupied roughly 32,000 square feet who was in recurring default of their lease obligation. So as the term of their lease ended on June 30, and we elected not to renew their lease to avoid future issues with this tenant. So this departure mainly explains our 46.1% renewal rate for the quarter and the departure -- as the departure at the end of the second quarter impacted our renewal rate by 54 basis points.

The third and final event, which explains -- I just want to give you actually a quick note regarding the space that this tenant occupied. So in the difference between the space, whether in respect to the bankruptcy that we had announced, this is not a single-user property. It's a multi-tenancy -- multi-tenant property, should I say. It needed a lot of cleaning. It needed emptying and -- for us to demolish some of the trade fixtures. We've completed this. The space is currently showing very well for lease, and it is currently listed with a national brokerage firm out in Edmonton.

The third event that impacted our occupancy rate in addition to impacting our renewal rate for the quarter is due to 3 suburban office tenants who elected to not renew their lease. So more specifically, we're looking at a 12,602 square foot office tenant located in Quebec City. We signed a short term -- it was a short-term lease that we signed with a government entity, and we knew that it would be leaving at the end of the quarter. So this impacted our renewal rate by 21 basis points. With a -- in addition to an 8,429 square foot tenant located in Montreal, again, in our office segment that was planned to leave at the end of their lease, and this impacted our renewal rate by 14 basis points.

And the last tenant who elected not to renew their lease is for 6,800 square feet in Ottawa. And unfortunately, this tenant, their government contract was cut short. However, this tenant occupied -- still does occupy space with us. So it was a renewal, but also, they gave back part of their space. So this is the space that they did give back to us impacted our renewal rate by 12 basis points. So as Michel also previously mentioned, following the end of the third quarter, we sold a suburban office property located in Quebec City. So the property showed historically low occupancy rates for us. And if we remove the property from our statistics, we show an increase of 80 basis points compared to last quarter, bringing our committed occupancy rate to 92%, which you can also see detailed on Page 9 of our presentation.

So in terms of our lease renewal activity because we did conclude some transactions [Technical Difficulty] we renewed 81,622 square feet with clients whose leases came to maturity throughout the quarter. The most significant renewals for us were concluded in our necessity-based retail segment, specifically in Quebec City with Avril, which is a grocery store, based in -- I mean, based in Quebec, similar to Whole Foods for about 20,000 square feet.

Latulippe, which is an outdoor clothing and equipment store similar to sale for 18,000 square feet; and Michaels, which is a craft store for about roughly 18,000 square feet as well, all again in our necessity-based retail segment. So in addition to our contractual renewals, we renewed roughly 41,000 square feet with existing tenants whose leases come to maturity in 2026 and the years after. Again, our necessity-based retail segment is still showing its strength. We renewed Trévi, which is a pool supply store that also builds pool, sell pool equipment for roughly 25,000 square feet. In addition to a 16,000 square foot transaction with our office tenant called Field Effect in Ottawa in our suburban office segment, also important to note that we concluded a long-term lease renewal with them in addition to a 3,000 square foot expansion. So they're going to be expanding their floor print to a total of roughly 19,000 square feet with us.

So for this quarter, we recorded, as I mentioned, a 46.1% lease renewal rate. As previously explained, the nonrenewal of our industrial tenants located impact -- located in Edmonton impacts our lease renewal rate by 54 basis points. And in addition to the 3 suburban office nonrenewals, which I discussed, together, we have a 47% basis point impact on our lease renewal rate. So these events explain our lease renewal rate for the quarter.

So in terms of our lease renewal spreads, we managed to achieve a 4.7% lease renewal spread for the quarter across all business segments.

On Page 9 of our presentation, you can see the historical data of our average lease renewal rate, which we presented on a yearly basis. So just a note that we -- for our year-to-date, we achieved a 4.8% renewal spread, and we're comparing the last -- we compare the quarters of the last years in respect to our current quarter.

Our increase in renewal rates are largely supported by necessity-based retail segment, which I previously discussed, and which contributed to 58% of our total lease renewal activity for the quarter.

So on this note, I'd like to turn the presentation over to Marc-Andre for our financial overview.

[Marc-Andre Lefebvre, executive]

Thank you, Stephanie. Good morning, everyone. So the financial results for the second quarter once again reflect the resilience of our business. The second quarter was impacted by 2 straight-line rent adjustments, as Michel mentioned, and that caused a negative noncash adjustment to rental revenue of $1.8 million. The first adjustment is related to the purchase of Lion Electric by a group of investors. BTB negotiated a new lease with them for a 2-year term. Recall that the original lease was a 20-year term, and that caused a negative impact of $1.6 million in straight-line rent. The second adjustment was caused by the early departure of an industrial tenant in Edmonton, which had a negative impact of $0.2 million in straight-line rent.

As Stephanie mentioned, this property was rapidly re-leased to a new tenant, XCMG Canada with a 10-year lease term. As a reminder, straight-line rent adjustment is -- it's an IFRS accounting requirement of evenly spreading out rent payment -- payments over the term of the lease to reflect, amongst other things, annual rate increases in rent. So if a lease is not -- is to end prematurely, the full amortization must be recorded in the same period at the end of the lease, which then creates a negative noncash adjustment.

So for the 3-month period ending June 30, 2025, rental revenue decreased by 5.3% compared to the same quarter last year. Excluding the said straight-line rent adjustments, rental revenue would have increased by 0.3%. Looking at NOI now, the NOI decreased by 9.2% compared to the same quarter last year. The decrease in NOI is driven by, again, the said straight-line rent adjustments. And if we look at cash NOI, then it's a different story. It increased by 0.5% compared to the same quarter last year. The increase in cash NOI is related to several factors, including: number one, operating improvements; number two, higher rent renewal rates; number three, increases in rental spreads for in-place leases, also known as step-ups; and number four, the lease with Winners/HomeSense, which began to produce rental revenue as of February 25.

Now if we turn our attention to organic growth, cash same-property NOI decreased by 1.5% for the quarter compared to the same period last year. The decrease in cash SPNOI is driven by the previously reported tenant bankruptcy in Q3 2024 and the early departure of an industrial tenant in Edmonton, as I stated before. FFO adjusted per unit was $0.083 for the quarter, a decrease of $0.021 from the same quarter last year. However, AFFO adjusted per unit was $0.095 for the quarter, an increase -- a slight increase of $0.001 from the same quarter last year.

The increase is mainly explained by, one, the previously stated increase in cash NOI and also a decrease in administrative expenses. Note that the net financial expenses before nonmonetary items were stable. We maintained our distribution to unitholders at $0.075 per unit for the quarter, which represents an annualized distribution of $0.30 per unit. The AFFO adjusted payout ratio was 79.2% for the quarter, a slight improvement from 80.2% for the same period last year.

Looking at our investment properties, the value remained virtually unchanged at $1.2 billion at the end of the second quarter. We did not make any portfolio-wide changes to our cap rates this quarter, and the weighted average cap rate for the entire portfolio stood at 6.7% or the same cap rate as at the year-end 2024. The sale of the property located at 3911 Millar Avenue in Edmonton resulted in a gain in fair value of $0.7 million, which represents a premium of 13% versus our book value.

We concluded the quarter with a total debt ratio of 57.1%. The weighted average term and average interest rate on our mortgage portfolio was 2.5 years and 4.36%, respectively. Finally, at the end of the quarter, we held $5.7 million in cash and $28.5 million was available under our credit facilities for total liquidity of $34.2 million. This is an improvement of $16.5 million compared to the end of 2024.

So this concludes our presentation, and we will now open the call to questions. Operator, can we please have the first question on the line?

[Operator]

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

[Matt Kornack, analyst]

I understand the straight-line rent adjustments, but could you give us a sense -- it doesn't sound like there was any downtime on Edmonton, but for Lion Electric, would the new rental rate have been in effect for the entire quarter? Or should we expect kind of a little bit of a drag on Q3 as a result and also...

[Michel Léonard, executive]

Just to answer your question, the new rate applied as of May 20 of this year. So until May 20, we received all payments under the, let's call it, the old lease, except for a fraction that was unpaid from December 1 to December 15 of 2024, that's already been recorded. And so there was no downtime between the trustee process and the new lease in place.

[Matt Kornack, analyst]

And when you think of that lease rate on that property, I know when you bought the property, you thought there was optionality around potentially moving rate higher. Obviously, the industrial market is a little bit thin at the moment. But still, should you think that at the end of the 2-year term or if it does, in fact, get terminated early, that there's potentially some upside to the rents on leasing that?

[Michel Léonard, executive]

Absolutely.

[Matt Kornack, analyst]

Okay. And then also, as you think of kind of the tenant turnover that you've had, particularly it sounds like the property in the industrial property in Montreal, you've made some progress. But how should we think of the timing on potential lease-up for that and some of the other vacant space in the portfolio?

[Michel Léonard, executive]

I think that we were quite ecstatic with the potential tenant that we had. And unfortunately, the city did not allow the use that the tenant would have required on the property. So we do have currently 2 prospects for the property that would basically come into fruition relatively rapidly. But if you want to be conservative, give us 4 to 6 months for the lease-up.

[Matt Kornack, analyst]

And still, call it, low double digits or maybe low teens in terms of rent expectations in terms of what you're seeing for the property there?

[Michel Léonard, executive]

Yes, call it, $12, if you'd like.

[Matt Kornack, analyst]

Right. Okay. On the disposition front, both what was done in the quarter, it sounds like that was maybe vacant, but also for the Quebec City one done subsequently. Was there any NOI generated by that property? I know it sounds like it was also had some vacancy in it.

[Michel Léonard, executive]

It was very little. I believe it was around $300,000 of NOI that was generated from this property.

[Matt Kornack, analyst]

Okay. And then maybe last one for me on the capital allocation front. It sounds like you're still in process on a few other potential dispositions. Can you give us a sense as to -- I think you kind of hinted at it, but you're making some progress there. What would be the quantum and the timing of potential additional dispositions?

[Marc-Andre Lefebvre, executive]

Yes, sure. Matt, so right now, we have 5 properties on the market. The estimated gross proceeds that ranges from $80 million to $100 million. Looking at it on a net proceed basis, we could fetch $15 million to $35 million. In terms of timing, I'll let Michel answer that part.

[Michel Léonard, executive]

We are in careful negotiations with the -- regarding the acquisition of an industrial property located out west. So obviously, everything is sort of dependent on our disposition. It's again the same principle where if we dispose too fast and acquire too late, then there's a problem. And if we acquire too soon and dispose too late, then also we're creating a problem for ourselves. So it's this timing issue that's always in the way of transactions, but we are advancing on this transaction carefully in order to be able to announce something maybe by the end of next quarter.

[Operator]

Your next question comes from Tal Woolley with CIBC Capital Markets.

[Tal Woolley, analyst]

Just to follow-up on -- it's been about 4 months since all of the tariff drama began here. I'm wondering if you can just speak a little bit more to demand across the asset classes for leasing new space. Now that some time has passed, do you have a better sense of what kind of impact it may be having or not having?

[Michel Léonard, executive]

Well, I think it's the latter. It's not having. Internally, we did look at our portfolio, look at the tenancy and whether we thought that -- whether a certain tenants would be affected by it. And what we're seeing is that the free trade agreement is still in place. Maybe that's a question for next year when it comes to renewal or renegotiation. But so far, I mean, we're touching wood and as everybody is touching wood because it doesn't seem that on any of our segments or investment classes that we do have impact.

The tenants that are defaulting on their leases is definitely not linked to any kind of tariff discussion. It's mainly linked to things that their operation per se and has nothing to do with the tariff imposed by the Americans.

[Tal Woolley, analyst]

Okay. And then you'd mentioned you're in the market -- marketing the central service should -- portfolio, and you mentioned you're looking at an industrial property you not want to buy. Again, sort of a similar question, but just in the transaction market, like are you finding like -- are you seeing the volume of interest on the dispositions? And when you're looking at properties right now, is it still quite competitive?

[Michel Léonard, executive]

Regarding the disposition, the brokers that we have retained signed confidentiality agreements with more than 30 possible buyers. And we had 8 purchasers that submitted paper on all or part of the portfolio. So I would say that I think that the trend is reversing regarding purchasing. I think that the major investors are looking at the market in order to position themselves even in the office segment. We're seeing interest in the office segment that we had not seen in the previous years.

Obviously, the cap rates are higher than they were in '18 or '19. However, the interest is there, and it's basically -- people that want to basically conclude great transactions in order to eventually profit from these transactions. So I wouldn't -- in the past, I called the people that have interest in office bottom feeders. And now we're sort of out of that process. And I think that it's more serious buyers that are in the market looking at acquisitions.

[Tal Woolley, analyst]

And then on the -- when you guys are looking to buy, obviously, you guys are very much interested in industrial. Are you like -- are you finding these processes still very competitive and you're seeing -- you're competing against several bidders?

[Michel Léonard, executive]

I think that cap rates have moved up, let's call it, substantially from the times of the pandemic, and it gives great opportunities for BTB to position them -- itself in the industrial segment.

[Operator]

[Operator Instructions] Your next question comes from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

Michel, can you maybe just provide a bit more color on the industrial acquisition that you're looking at? And then secondly, how did the sale price of 1170 Boulevard in Quebec City compared to the book value?

[Michel Léonard, executive]

Do you have that number for the...

[Marc-Andre Lefebvre, executive]

1170, we already had reset book value in line with the price of the...

[Michel Léonard, executive]

I think the adjustment to the book value was done in Q4 or even earlier in the year. In Q2 -- yes, Q2 2024. Because we had received the offer, and the offer was firmed in Q2 2024. And we had issues regarding closing that eventually were solved, and the issues were mainly linked to the mortgage financing for that property. And this issue was recently solved. So we were at a closing on a weekly basis that -- and eventually, it got closed, and we were very happy for this transaction to occur. So the adjustment to the book was already done. And I think from memory, this is a property that we had purchased back in 2010 for $13 million.

[Pammi Bir, analyst]

Got it. And then, sorry, just on the first part of the question, any additional color on the industrial acquisition that you're looking at? I think you said it was in the West, but I think you...

[Michel Léonard, executive]

Yes. It is in Edmonton. And right now, I can't disclose anything more because there's nothing firm at this point. But I anticipate that within the next few weeks or a month or so, we should be able to get closer to something that's firm.

[Operator]

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

[Michel Léonard, executive]

Thank you very much for joining us today. I realize that most of you were on holiday yesterday. So it's quite an awakening to join a call like this morning. So thank you for participating. And I think that most of our results were affected by noncash adjustments that had to be made in accordance with IFRS principles, accounting principles.

And as a result, I think that, again, we're very resilient, and we're looking forward to seeing you again or speaking with you again for our third quarter results. Thank you very much for joining us today.

[Operator]

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