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 2018 Third Quarter Ending September 30, 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 and/or implied by such forward-looking statements. The risks and uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust's management discussion and analysts -- and analysis of financial results, and its Annual Information form, which was filed on SEDAR, and on the 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. Benoit Cyr, Vice President and Chief Financial Officer. Please go ahead, gentlemen.

[Michel Léonard, President, CEO & Trustee]

Thank you very much, and thank you for joining us this morning. We're reporting, as mentioned earlier, on our Q3 results for the period ending on September 30 2018, where we saw activities; an 18% increase in rental income, a 28% increase in our NOI, our FFO ratio down to 90%, and our AFFO ratio down to 98%. Our recent acquisitions are impacting our results positively. Our occupancy rate is slightly down to 89.3% and that was affected by the Shire lease cancellation that we are going to discuss a little bit later. Our debt ratio was down. I'd like to remind you that at the end of 2015, our total debt ratio was 71%.I'd like to give you an update on our metrics, regarding the status of the property. During the last conference call, we reported that we had received and accepted an offer to purchase a conditional upon due diligence to be completed. After the due diligence process, regarding the negotiations that took place, the transaction fell apart. And during the quarter, we leased 35,000 square feet on a temporary basis to a user at $7.50 net plus operating and real estate taxes, the proportionate share of operating in the real estate taxes. The proceeds from this lease will cover our operating costs for 2018, and will give us ample time in order to reflect that to the future of this property, regarding its configuration, its use and the way that we are going to treat it. It is a property that is slated for redevelopment after due research. The land is owned for office, industrial and retail uses, and hence, we are marketing this property with the 3 uses in mind. I'd like to also remind you that, if we are able to secure or transform this building from a industrial use to a retail use or an office use, that the NOI that is going to be derived from this property is going to be much greater than the NOI that we received during the Pharmaprix tenure.As reported, we entered into a lease cancellation agreement with Shire Pharma on our property located on Alfred-Nobel in the Technoparc, in Montreal. This property was 100% leased, and one of our tenant Otsuka wanted to expand, and if we were not able to expand or negotiate the transaction with this expansion in mind, and we believe that there are going to be future expansions from Otsuka in this property, then they were going to leave our property.Given that Shire Pharma had decided that they were retracting from Canada, we knew that we could approach them. And unfortunately, we were not able to only cancel 9,000 square feet, and we negotiated with them the full cancellation of their lease. And the payment that we received, the one-time payment that we received was equivalent of 75% of the outstanding obligation under the lease. And hence, we were able to accommodate our tenant. I'd like to remind you that usually a lease cancellation is concluded for a -- proceeds that are much less than 75% of an outstanding obligation.And to report on our sales process, you saw that during the -- that recently we finalized the agreement to sell 6 properties in Sherbrooke for net proceeds of $30.1 million -- sorry [ $30.4 million ], which reflect the adjustments granted to the purchaser at closing. In Q1, we had sold 4 properties; in Q2, we sold 2 properties, and we believe that we can redeploy the capital glean from all these transactions in 2018 to acquire approximately $80 million of assets.Regarding our -- the consequences of our strategic plan analysis, I'm pleased to report that almost all of the properties that we had identified for sale have been sold, except for the Magog property, the Harvey property, the Henri-Bourassa property and the Sainte-Therese property. We are still awaiting the sales for our Antonio Barbeau property. There is only one condition left, and it is the financing conditions for the purchaser.As far as acquisitions, we are in discussion -- to redeploy our capital. We are in discussions with vendors. We are not yet in a position to announce any transaction, and we do believe that we're not advanced enough to close transactions and acquisitions in 2018. And the lack of the redeployment of our -- and the consequence of the lack of our redeployment in 2018 will definitely have an impact on our NOI for Q4.Regarding our Crescent property, we moved into the property on October 8 of this year. We occupy approximately 8,000 square feet. We concluded a temporary lease agreement on the fifth floor, and hence, the building as far as the office occupancy is almost full. For retail purposes, we have almost all the ground floor available for lease and the first floor. We are expecting lease proposal soon regarding the use. We have a very active pipeline of possible tenants for the ground floor and some for the first, including the first floor. As far as lease renewals are concerned, so far this year, we've renewed [ 323,000 ] square feet. Our retention rate for the quarter is 46.9%. The increase that we saw in the renewal rate in Q3 is 4.4%, as well we leased 251,000 square feet of new tenants so far this year.Regarding the leasing aspect in the certain properties that are showing higher vacancy rate, Complexe de Lery, we were -- this is in [ Trois-Rivieres ], we were able to close a small transaction with PricewaterhouseCoopers for roughly 2,400 square feet with the possibility of growing to 4,000-square feet in Trois-Rivieres. King Street West in Sherbrooke was sold, Harvey in Saguenay is for sale still. In Complexe Lebourgneuf, we are expecting 2 large transactions that will probably solve one of the -- one of these problems that we have with Complexe Lebourgneuf Phase I. And in Cornwall, we have a lot of activity on 725 and 705. There is a substantial activity in that market, and we feel that by year's end, we will be able to show at least 1 transaction for close to 90,000 square feet.With this summary, I'd like to dwell into the details and ask Benoit to proceed with his analysis of the results.

[Benoît Cyr, VP & CFO]

Thank you, good morning. As mentioned, we sold 6 properties since the beginning of the year, including 2 during this quarter; the one known as Promenades St-Noel in Thetford Mines, Quebec, that was completely vacant and classified as a property under development and the 3036-3094 De Chambly road in Longueuil, Quebec. The net proceeds after reimbursement of the mortgage loan and related fees were used to partially pay back our lines of credit.On July 11, we acquired mixed-use property approximately 31,000 square feet located at the corner of Sainte-Catherine, Street West, Montreal and Crescent Street for $25.2 million. We, as mentioned, recently moved our head office to this property, where we occupy approximately 8,000 square feet. End of July, we acquired a shopping center in Levis, Quebec for $42.6 million, where WalMart is the anchor tenant. This 205,000 square foot shopping center is located in the -- near our Carrefour Saint-Romuald, a property we acquired a year ago.At the end of September, our portfolio consisted of 71 properties, 5.5 million square feet, and having a market value of approximately $820 million. Following the end of the quarter, we sold 6 properties, all located in the Sherbrooke City area for $30.4 million. The net proceeds after transaction costs and repayment of mortgage financing for $16.2 million, were used to repay other maturing mortgage loans and to the partial repayment of our acquisition credit line.As of today, our portfolio consisted of 65 properties, 5.2 million square feet and market value of approximately $719 million. As mentioned on August 16, we came into a surrender agreement with Shire Pharma that occupied approximately 35,000 square feet in one of our building. This transaction was done to meet expansion requirement of another existing tenant. This non-recurring revenue increased our net income, distributable income, quarterly FFO and AFFO per unit by approximately $0.026.For the quarter, rental revenues were up 27% or $4.9 million compared to the same in 2017. This increase is due to the risks in acquisitions that we did in Q4 '17 and Q3 '18 and to the non-recurring revenue of $1.5 million as we've just discussed.With regard to an increase in our operating expenses of 20% or $1.6 million between the third quarter of '17 and the third quarter of '18, and again, recent acquisitions explain this increase. Our NOI is up 33% for the quarter compared to the same in 2017 and is at 57.7% as a percentage of revenues.Net financial expenses are up from $4.6 million to $4.9 million, approximately 7% for the quarter, mostly due to our mortgage loans on properties recently acquired and to the use of our lines of credit. We've accounted a fair value increase of $985,000 on our swaps at the end of June. This increase of value is recorded as a reduction of financial expenses and is due to recent increases of interest rates in Canada.Our average weighted contractual rate of interest on mortgage loans is now at 3.89%, 6 basis points higher as at the end of Q3 '17 and the weighted average term of our mortgage loan portfolio is 5.5 years, 7 months less as a year ago. Our trust and administrative expenses are at $1.2 million, approximately $200,000 more as in Q3 '17. This difference is mostly due to the bad debt expense that was showing a credit balance last year and to some hiring fees.To appraise our portfolio, at the end of each quarter, we use capitalized NOI -- decapitalized NOI method. We use cap rates received from external charter evaluators and experts. We have estimated that the value of our portfolio recorded in the balance sheet at the end of September required an adjustment of $776,000 to adequately represent its fair market value, and especially the selling price of properties sold in October.The weighted average cap rate of the entire portfolio is 6.91% at the end of September '18, down 14 points from September '17. We present a net income of $5.8 million for the quarter, $0.104 per unit compared to $4.3 million last year, $0.101 per unit. The same property portfolio for the quarter shows an increase of its revenues, but a small decrease of 1.7% of its NOI and 2.2% of its net property income.Our distributions increased from $4.5 million in Q3 '17 to $5.8 million in Q3 '18, including -- and it includes 11.7% of our distributions in units under our [ group ]. This increase in our distribution is due to the last 2 units issuance. One, in last October '17 and the recent one in June '18. Also we issued in May, 532,000 Class B LP units following the acquisition of the remaining portion of Complexe Lebourgneuf's Phase II in Quebec City.Our distributable income for the quarter amounted to $7.5 million or $0.134 compared to $4.5 million and $0.114 per unit in Q3 '17. Our distribution payout ratio for the quarter stood at 78.4% from 91.8% last year. These improvements in our per unit and payout ratio are mainly due to the recurring revenue of $1.5 million from Shire Pharma lease cancellation.Our FFO reached approximately $7 million for the quarter compared to $4.7 million a year ago, $0.126 per unit this quarter and $0.11 last year. The FFO payout ratio for the quarter stood at 83.3% from 95.5% a year ago. Finally, our AFFO amounted to $6.3 million, $0.114 per unit this quarter and $4.3 million and $0.101 per unit last year. The AFFO payout ratio stood at 92.1% from 104% a year ago.Our balance sheet presents investment properties at fair market value, amounting $819 million compared to $751 million last December. We had $2.1 million in cash and other assets amounted $12.4 million. We spent approximately $1.5 million in recoverable and non-recoverable CapEx during the quarter. Also, we spent $1.9 million in TIs to meet the specific needs of our clients, as well as commissions to a broker.The non-recoverable portion of our CapEx is at $432,000, the same as the provision in our AFFO calculation. Mortgage loans payable amounted $468,000 at the end of September compared to $428 million at the end of last December. Our mortgage loan to value ratio is now at 56.3% compared to 56.8% in June '17 and 56.5% in last December.We have 2 series of debentures outstanding for a net book value of $48.6 million. The Series E is now redeemable at their principal amount. They mature only in March 2020 and for now, it's not our intention to redeem them. At the end of June, our two lines of credit were partially used, $900,000 for the operation line and $15 million for our acquisition line, following the 2 acquisition we did in July. As of today, we have reimbursed our operation line and our acquisition line is now at $10 million. We had $24 million of mortgage loans coming to maturity in 2018. $13 million were with properties sold in October, $3 million were reimbursed also in October and the balance is under final negotiation for refinancing with a new lender with -- also with some maturing in 2019.That's all from my section. But before turning back to the facilitator, I will answer some questions received from Laurentian Bank Securities by email previously today. They are asking what will be NOI impact of the 35,000 square feet lease termination. The gross rent was approximately $100,000 a month, less the new tenant of signing 9,000 square feet, which is approximately $26,000 per month. So it leaves approximately $75,000 per month as net impact. Second question, what was the -- was the $776,000 fair value charges related to these termination note? The $776,000 is mainly related to properties sold in October. Third question, what is the current interest rate on our credit facilities? The operation at credit facilities, the interest rate is I think at prime rate plus 0.75%, which now is 4.70% and the acquisition line is at the prime rate plus 3.25%, which gives 7.20% right now. 6 properties were sold in October, what was their annual NOI contribution? Approximately $2.2 million a year as NOI contribution.On Page 32 of your MD&A, there is a table showing maintenance CapEx for the quarter. They are asking where this -- if this number is included in our statement of cash flow and where do you include the cash spent on leasing fees and the leasehold improvement. They are both -- show the item addition to investment properties. They are asking also [ $34 million ] of mortgage maturing. I think I have already answered to this question, but the interest rate right now is not known yet. That's all for the questions I have received.I turn back the conference to the conference facilitator. Thank you.

[Operator]

[Operator Instructions] Your first question will be from Fred Blondeau at Echelon Wealth Partners.

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

On the same-property NOI decrease of 1.7% for the quarter, could you give us a bit more color on the year-on-year increase in operating expenses?

[Benoît Cyr, VP & CFO]

Well nothing -- nothing very special. It's a seasonal movement. We spent more in this summer than last summer, and right now, we're taking care of our expenses. So probably Q4 will be lower than it was last year. It's really seasonal and it's not under a specific -- under a specific property.

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

And Michel you mentioned that redeployment will affect your same-property NOI, I guess for Q4 in 2019. What are your expectations at this point?

[Michel Léonard, President, CEO & Trustee]

My expectations at this point is that, that we should be able to redeploy the capital. I'm hopeful for [ year ] then and if not 15th of January. So as I mentioned, I think that from the date of closing, which was October 1, regarding the Sherbrooke closing, that Benoit mentioned, is equivalent of $2.2 million of NOI, I think that the month of November, December and January are going to be impacted, but we do expect that our closings are going to generate more NOI, than the disposition of the Sherbrooke properties and the other dispositions that we have concluded during the year.

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

So can you give us a range for Q4 and 2019 as a whole?

[Michel Léonard, President, CEO & Trustee]

I don't know if -- I don't know if that's the question that I can answer at this point, not because I don't have the answer, but I don't think that this is a comment that I'd love to make under this call. In other words, I'd like to help you, but unfortunately right now, it's very difficult for me to answer this question.

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

Now that's fair, that's fair. And on the --

[Michel Léonard, President, CEO & Trustee]

I think that I've already indicated a little bit more than I should have by telling you that the replacing NOI is going to be higher than what we lost.

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

And on the disposition of the Sherbrooke portfolio, what was the cap rate on this one?

[Michel Léonard, President, CEO & Trustee]

It was a little bit shy of 7.75%.

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

And you mentioned your non-core assets, what's the size of your non-core portfolio as a whole at this point in dollars?

[Michel Léonard, President, CEO & Trustee]

You mean what's left for us to dispose?

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

Yes, yes in dollars.

[Michel Léonard, President, CEO & Trustee]

In dollars, okay, I'll add it up --

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

Approximately.

[Michel Léonard, President, CEO & Trustee]

Well, I can go approximately. I think that the Magog property is roughly worth $2 million. I think that the Harvey property, roughly 4.5% -- the range is 4.3% to 4.6%, Henri-Bourassa, I would say the range 4.9% to 5.2%, and Sainte-Therese, because of the leasing activity that we have right now in this property, if we are touching wood, which I am, we should be able to finalize the lease within the coming 2, 3 weeks where this property is going to be fully leased. So given the fact that I don't have the evaluation in my mind with a property that's re-leased, I can't give you the number. But this would be -- I would wait on the disposition, obviously after the tenant has moved in and that -- they start paying rent. So this -- I wouldn't foresee this property to be sold in the first or second quarters of 2019. We're awaiting the sale of Antonio Barbeau. We are also hopeful that the purchaser is going to obtain financing to conclude, and Antonio Barbeau is roughly -- by memory is around $7 million.

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

And lastly on the AFFO payout ratio, maybe for Benoit, if you exclude the one-time items, the $1.5 million from Shire, what are your expectations for Q4 and 2018 as a whole?

[Benoît Cyr, VP & CFO]

Again, it's difficult to answer that. The impact on the quarterly payout ratio is approximately -- I did the calculation, probably around 25%, but what our expectation for Q4 and 2019, again, it's difficult to --

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

No, '18, 2018.

[Michel Léonard, President, CEO & Trustee]

Yes, Q4 '18 and '19, it's difficult for me to answer. And again, the reason, if I may add just like -- the reason that it's difficult to answer this question is number 1, we've had dispositions like we're overall thrilled by the results of our strategic plan where we've executed very well on the plan. We've sold what we said that we were going to sell. We repurchased what we said that we were going to repurchase. We see that our acquisitions that were concluded at the end of 2017 and during 2018, are producing excellent results for us. But the redeployment of capital is slow. So unfortunately the timing, I mean everybody wishes that you're purchasing before you sell, so then there is no impact or the timing is just perfect that you're purchasing at the same time that you're selling, but sometimes there are timing issues. And in our case, what I think, what Benoit was attempting to do, to say, and I don't want to put more words in his mouth and he can confirm or not. But the notion of the timing of our payments as a result of the redeployment of capital and all the execution of the strategic plan, that's what's affecting it and that's why when he looks, he thinks, he puts on his glasses and he is looking at the numbers, it's very difficult to estimate at this point. And it is unfortunate, because I'd love to -- we'd love to give you the number, but everything is related to timing of this point.

[Operator]

This is conference operator, again. [Operator Instructions] And at this time there are no further questions. Please go ahead, Mr. Leonard.

[Michel Léonard, President, CEO & Trustee]

Well, thank you very much. And my last comment, it was my summary. So I mean, we're quite happy with the results of our strategic redeployment. I think that we are repositioning our portfolio very well for the future. 2018 has been a fruitful year as far as that's concerned. I think that we are on the right path in order to make acquisitions with the -- using the proceeds of the dispositions that were concluded in 2018. Timing issues, yes, but I can -- from looking in the future and then looking at the properties that we are negotiating the acquisitions, I think that you are going to be satisfied with what we're going to put together. So thank you again for your contributions to BTB. And the fact that there is interest in BTB, I think that is showing that generally, we're doing what we're supposed to do and executed on what we said that we were going to execute, the timing -- not the timing, but the fact that the portfolio is doing well. We rid -- the Shire lease cancellation is part of our real estate business. And what I forgot to mention is the fact that it allowed us to recast the lease with Otsuka basically extending a lease that was maturing in 2020 by extending it to 2028. So in the overall scheme of things, I think that it was a very positive contribution and to where -- and to be able to negotiate this cancellation of 75% of value, I think that there was good negotiation on our team's part.So with this, thank you for your contribution, and your help with BTB, and we will join you in the next conference call for the Q4 2018. Thank you again. Bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.