BTB Real Estate Investment Trust

TSX:BTB.UN

Earnings Call Transcript

[Operator]

Good morning. My name is Sylvie, 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's 2021 Third Quarter Results Call for which management will discuss the quarter ended September 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 gives 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 btb -- I'm sorry, at www.btbreit.com.I would like to remind everyone that this conference is being recorded. Thank you. And I would like to turn the conference over to Mr. Michel Leonard, President and Chief Executive Officer; and Mr. Mathieu Bolte, Vice President and Chief Financial Officer. Ms. Leonard, you may now begin the conference.

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

Thank you, Sylvie. Welcome to our Q3 conference call for 2021. Our portfolio continued to perform steadily through all asset class and geographies. We saw a slight increase in our same-property NOI. The industrial property acquired on June 29 of this year had a positive impact on our third quarter results. We had an active leasing activity with a total of 68,000 square feet, including 51,000 square feet of leases renewed and 17,000 square feet of new leases concluded with tenants. Our occupancy rate stood at 92%, consistent with Q2 2021. And we have ongoing negotiations, leading us to believe that we are going to end the year at 93% of occupancy rate.We successfully closed a new revolver credit facility of $35 million with an additional accordion to increase it by $25 million with National Bank of Canada, and this complements the current facility that is in place. Yesterday, we acquired 2 Class A life-science and technology office buildings. The new properties will generate an additional FFO of $0.04 per unit on an annualized basis. We're very pleased with this acquisition as it allowed us to reach $1 billion of assets.And now just -- I'm going to give you a little bit of detail regarding this acquisition. So the purchase price was $74 million, with an NOI in place of $4.3 million. The largest tenant, representing 60% of the NOI in 2344 Alfred-Nobel is Bristol-Myers Squibb with a lease expiring in 2031. The second largest tenant in that property is Hewlett-Packard, representing 26% of NOI with a lease expiring in 5 years. The largest tenant in 2600 Alfred-Nobel is ICU Medical for 48,000 square feet with a lease expiry of 2030, and the second largest is Innomar Technologies.So we did conclude, as usual, our Phase I environmental study and no Phase II was required for the purchase of these properties. We did conduct, as usual, a property condition report, a structural analysis of the properties, and we did confirm the revenues, the NOI that were in place. So based on this, we concluded the transaction yesterday.Our key financial and operating metrics for Q3 2021. Leasable area of 5.4 million square feet. And as reported yesterday, this new acquisition is going to take us to 5.6 million square feet. The investment property, the fair market value has appraised by outside and -- outside appraisers as $924 million. If you add again the $74 million of acquisitions of yesterday where we surpassed $1 billion of total assets. We renewed 64,000 square feet, including new leases that were concluded during the quarter. We collected 99.2% of our rent during the quarter.Our total debt ratio was lower to 55.8%, which is a reduction of 3%. Our mortgage ratio stood at 52.6%, again in decline. Our FFO per unit was at $0.095, and it suffered from the fund raise that occurred in April, where the moneys were deployed until yesterday. So you can make the analysis on the basis that the new acquisition is scheduled to contribute $0.041 per year on a FFO basis, meaning that our results would have been $0.105. Our year-to-date AFFO payout ratio, it stood at 77%.Regarding our leasing and renewal activity, we conclude, as I said, 68,000 square feet of renewed leases and new leases. We achieved a cumulative average increase in renewal rates across all business segments: industrial at 14.6%; in the office segment at 1%; and the retail segment at 4.6% increase upon renewal of leases. We're finalizing the work toward a scheduled arrival of Princess Auto in our FX Sabourin property for 38,000 square feet. As you remember, this lease was concluded following the departure of Sportium.Throughout Q4 2021, we strongly believe that we will be finalizing the leasing of approximately 50% of the 81,000 square feet of space that became vacant in 2020 due to the related to COVID-19 departures. 26,000 square feet in Gatineau and an additional 12,000 square feet in our property located on FX Sabourin. Our year-to-date renewals are 170,000 square feet out of 223,000 square feet due to renewal, giving us a renewal rate of 76% on a year-to-date basis. For the year 2022 and later, we already concluded 242,000 square feet of lease renewals. And this is obviously showing a sign of life and our ability to lease and gleaning higher rents from our negotiations.Our real estate portfolio by operating segment: 26% of industrial properties; 26% of retail properties; and 48% of office properties. Our year-to-date occupancy was 0.1% on the minus side. Industrial increased by 2.6%, office, a slight reduction of 0.2%, retail, a slight reduction of 2.7% that was related to the departures that we already announced in 2020. The increase in average lease renewals of 3%, as I mentioned earlier. And we're focusing on investment activity on the industrial and suburban assets with strong fundamentals, good pipelines and value creation and maximizing out of the retail portfolio.What I mean by that is that in the years -- coming years, we are not going to acquire additional retail properties. We are going to focus on redevelopment of our current retail portfolio. And the properties that are not going to offer the potential of unleashing value may be disposed in the coming years. Our real estate portfolio in -- by geography. 20% of the portfolio is located in Ottawa, 26% in the city of Quebec and 54% in Montreal. So -- and regarding our geographic sector, we are looking at diversifying our geography as well.Now based on -- following my presentation, I'd like to ask Mathieu to present to you the financial overview of Q3 2021.

[Mathieu Bolte, VP & CFO]

Thank you, Michel. Rental revenue increased by 1.7% for the quarter and 4.3% year-to-date, so the additional recoveries of the previous quarter as well as the accretive acquisition have supported that group. NOI increased by 2% for the quarter and 8% year-to-date. So the positive impact on revenue and NOI from the recent Kieran acquisition started this quarter. So it was closed, as Michel mentioned, on June 29. It is triple net lease and generates about 800,000 of NOI per year. Also to mention, the Alfred-Nobel acquisition announced yesterday, as Michel mentioned, so we'll have to consider about 4.3 million of additional NOI for the first year. And those 2 acquisition will be raising a new equity. So that's important to note.Although, we hadn't faced headwinds from the pandemic since the previous quarter, we still have around 800,000 square feet of space that became vacant at the end of 2020. And as well, as Michel mentioned, about 50% will be signed in the fourth quarter. So when we look at the NOI for the same-property, we show an increase of 0.1%, but there is going to be a pickup with the current leasing activity. 81,000 -- 80,000, sorry.

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

Not 800.

[Mathieu Bolte, VP & CFO]

No. 80,000, sorry. Recurring FFO per unit was $0.095. It's down by $0.014 compared to the same quarter last year. Again, the timing of the equity issuance that we did in April, we used part of the issuance to pay down the debt, the credit line. We did the acquisition of Kieran in June, and we still have some remaining cash that we deployed yesterday with the Alfred-Nobel acquisition. So on a cumulative basis, FFO per unit was $0.311, up $0.027 compared to last year. And again, on top of that, we'll have to add the AFFO per unit for the new acquisitions.The cumulative recurring AFFO payout ratio was 77% compared to 105% for the same period last year. So this is an improvement of 28% year-over-year. With the equity issuance and debenture conversions that we are still seeing, weighted average number of units increased from 60 -- about 63 million of units last year in the same quarter to 74 million units in Q3 2021. Weighted average interest rate for mortgages was 3.53% compared to 3.61% for the same quarter last year. So it's a decrease of 8 basis points due to the recent mortgage refinancing. Total debt ratio was 55.8%, an improvement of 0.2% since last quarter and 3.9% improvement compared to the same period last year.So one thing -- Michel mentioned the new credit line, so we want to highlight as well the favorable pricing. So it's $35 million credit facility at prime plus 100 compared to the current credit facility that we had for acquisition of $15 million at prime plus 325 basis points. So that's a great improvement to support our operation and the future growth. We finished the quarter with a cash position of $19 million. So in addition, so we closed the additional trade facility of $35 million. So in total, we have about $72 million of available liquidity to support the operation and the growth of the organization.Our refinancing commitments for the last 3 months of the year totaled $64 million, and we already did $30 million that is completed at the end of October. So the remaining $34 million is being finalized for 2 properties, and this will be closed by year-end. Following the issuance of the Series H debenture last September, so we continue to receive conversion notices. For a total of about $800,000 this quarter. And since last September, so when we did the issuance, we were able to convert about 25% of the debentures, about $7.5 million. So remember, the conversion price was set at $3.64, and the unit closed at $4.02 at the end of the quarter.So overall, for 2021, we will complete the refinancing of about 20% of our portfolio, an average term of 6.7 years. So we're quite happy to see the great appetite from the lenders for BTB's assets in securing long-term financing.So this completes our presentation. With that, we'll move to the Q&A.

[Operator]

[Operator Instructions] And your first question will be from Matt Kornack at National Bank.

[Matt Kornack, Analyst]

With regards to -- I understand that the Saint-Laurent acquisition, it has life-science tenants, but it's primarily office usage. Have you looked at or seen any opportunities in the life-sciences lab space area? And is that something you'd look to maybe expand into?

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

Yes, definitely. We have another opportunity that we're looking at right now, and we strongly believe in the future of that segment.

[Matt Kornack, Analyst]

Okay. And I appreciate the details on the largest tenants and the lease terms there. Are there any near-term maturities for smaller tenants within those buildings?

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

Yes, very small, Matt. Like there's one that's 6,000 square feet coming up to maturity next year. And so far, there's no reason to believe that they're not going to renew. And the rest is just longer term, '24, '26 and so on.

[Matt Kornack, Analyst]

Okay. And then, Mathieu, in terms of the sequential moving parts in NOI, you had a big recovery last quarter. But was there anything else onetime sequentially that would have happened between Q2 and Q3? Just trying to understand the gap there a bit.

[Mathieu Bolte, VP & CFO]

No, Matt, nothing. I mean, we had a material adjustment in the last quarter, but this quarter, it is nothing pretty to impact the numbers.

[Matt Kornack, Analyst]

Okay. And then would you view sort of this quarter as being -- obviously, there's some seasonality to your numbers, and there's going to be an acquisition. So we'll model that accordingly. But would this be a pretty good run rate, I guess, for the operations of the portfolio, excluding, I guess, also the lease up that you're going to see subsequent to quarter end?

[Mathieu Bolte, VP & CFO]

Yes. I think it's to capture the run rate for its acquisitions. And the denominator of the higher shares that we have without being -- without having the NOI for this quarter for the acquisitions. But other than that, I think it's pretty clean.

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

I think the fact that we don't have the penny that is contributed by the acquisition is -- so instead of $0.09 per unit, it should be, I think, a good run rate would be 10.

[Matt Kornack, Analyst]

Okay. And then the FFO -- or sorry, maybe the NOI contribution from the leasing that you anticipate doing to get you to 93% by the end of the year. Will that -- how should we think of that coming online sort of in Q4 versus Q1 because presumably, it's taking place?

[Mathieu Bolte, VP & CFO]

I would model it all in 2022.

[Matt Kornack, Analyst]

Okay. And can you provide a quantum there in terms of the NOI contribution, if you have it or rough approximation?

[Mathieu Bolte, VP & CFO]

I would have to calculate it and get back to you.

[Operator]

Your next question will be from Yash Sankpal at Laurentian Bank.

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

What was the rent lift achieved on the renewals in the quarter [Technical Difficulty]?

[Mathieu Bolte, VP & CFO]

For the -- I can give you the details for the quarter. I know year-to-date, it's 3%, with about 15% for the industrial segment and the other 2 segments in a positive zone as well. I can give you specifically for this quarter.

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

Okay. And this is to Michel. The reorganization...

[Mathieu Bolte, VP & CFO]

Sorry, Yash, for the quarter, so it was retail and office. Office was 1.7%. Retail was 4.3%, for a total 1.8%.

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

So overall is 1.8?

[Mathieu Bolte, VP & CFO]

Yes.

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

Okay. So the next question is for Michel. About the retail component you mentioned, the reorganization. What is the time frame? And what is the scale you are looking at?

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

Well, what we're looking at is how to unlock value on our retail properties. Obviously, looking at redevelopment, the potential of redevelopment of our retail properties. We are working steadfast on one possible redevelopment that would bring a lot of contribution -- to a onetime contribution to BTB. I can't go into the specifics of this potential redevelopment because we haven't concluded a transaction yet with a partner that would be responsible to redevelop the retail component. But it's basically akin to selling air rights where we keep the retail -- redevelop part of the retail on the site and basically adding a lot of density on the site.But we're in negotiation to do so. And this negotiation, obviously, would be subject to city approval. And like that we wouldn't be able to announce, I would surmise before Q2 of 2022. We have other properties that -- so this is, if I can call it this way, this is our beta test, where we don't want to handle a lot of those at the same time. So it would -- it could be a longer process than anticipated, but we want to do it with a good organization in mind, and in order to unlock a lot of value. So -- and we do have retail centers that are primed for this kind of redevelopment.And we have other retail that, in our view, would not be primed for this type of redevelopment. And so we would do an organized sale of basically recycling our capital and attempting to reinvest in the 2 segments that I mentioned, so the industrial segment and the office segment. So -- and more or like in the provinces of Quebec, Ontario and other provinces in Canada. So our goal is to redeploy our capital in 2 segments as opposed to be in 3 segments.

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

Right. So let's say, 5 years down the line, what percentage of your NOI would come from the retail segment? Will it be [indiscernible]? Or you think...

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

In 5 years' time, probably 0.

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

So you want to get rid of your entire retail exposure?

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

Yes.

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

Okay. That's good. And then this is about your office portfolio. Over the last one quarter, what do you think has happened in terms of the utilization rate?

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

Our utilization rate?

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

Yes. Like what percentages of your buildings are being used or [indiscernible].

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

Okay. You mean physical occupancy. We -- generally -- and this is happenstance. This is just a guesstimate. We would -- we are hovering at a little bit more than 60%.

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

Okay. And one last question. How is your acquisition pipeline looking at this point? And are you targeting any particular markets?

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

I would say that our pipeline is substantial. And because our target -- I mean, it took us 15 years to reach $1 billion of assets, almost to the day. We're just a month late on the 50th anniversary of BTB was on October 6 and on October 8 -- and on November 8, we reached $1 billion of assets. So 15 years and a month took us to get to $1 billion. And our plan is to get to $2 billion in the next 5 years. So not only are we beefing up the organization as far as talent is concerned in order to be able to purchase $200 million of assets every year for the next 5 years in order to reach the goal. But it's -- to realize that if we dispose of certain assets, then it means that we're going to have to purchase more than $200 million of real estate every year in the next 5 years. But the target is to get to $2 billion in 5 years.I think personally that it's very achievable. And the reason why it's achievable is because you witnessed an acquisition yesterday, that was $74 million. So we're looking at larger acquisitions. So obviously, when we started up, we were small, we were purchasing properties at $1 million, $2 million and so on. And in order to reach our goal, now we're going to have to purchase in bulk, meaning that the larger acquisitions or more properties, more portfolios of properties in the next 5 years in order to reach the $2 billion. So -- and we fine-tuned our operation. Mathieu's contribution to the operation was fantastic. Because we're automating a lot of processes. We're no longer a bucket shop. And so we're driving and hiring people that are going to be able to accompany us to $2 billion.So -- and that's our plan. We've -- I mean, we never talk about what goes on, on a daily basis in the operations of a REIT. But we've automated, for instance, the process of preparing financial statements. We've automated the process of preparing our MD&A. We're automating our accounting -- our accounting was automated, but not to the level that we wanted it. So we're increasing the automation of our accounting and reporting systems. We are increasing the automation of client or tenant requests by going to a new model and increasing accessibility. And at the same time, increasing knowledge or the facility or the ease of managing a facility. So a lot of automation has taken place in 2021 for BTB.And this is going to obviously make us better. And if you look also at the status and the quality of our employees, it's stellar. And we have an immense contribution from them, where all of a sudden, we have the right brains working for BTB. So we're very pleased with the progress that we've made in 2021, in order for us because we knew that we were going to put in front of our Board and in front of our faces a target to double the size of our business. And -- but we had to have the right employees and the right tools in order to accompany us or assist us to get to $2 billion. So this is an ongoing process, obviously, but we started off very, very well. And we fully believe in our goal of $2 billion based on what we've achieved so far and what we can achieve with the employees that are on staff and the different processes that we put together.

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

That's good color, Michel. So is it fair to assume that you are happy with your current geographic presence or you want to go into other markets?

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

We are open to going to other markets. So we're not closing. Yes, 80% of our assets are in the province of Quebec. Definitely, our target is to increase Ontario for sure. We've attempted acquisitions in Ontario over the past 2 years, and it's been very difficult. Unfortunately, we finished -- almost in every bid that we made, we finished second. So as Gills Villeneuve used to say, if you finish second, you're the first of the losers. So -- and so we're not pleased. So we definitely have to change the way that we approach the markets in Ontario in order to be able to be more successful.So -- and from all consideration, it looks like our process -- our Board approval process may be a little bit too long and too winded in order to get the transactions in suburban Toronto, but we will adapt, and we definitely are targeting suburban Toronto.

[Operator]

[Operator Instructions] And your next question will be from Chris Kout at Canaccord.

[Christopher Koutsikaloudis, Associate]

Just one question for me. Looking at the leases you have expiring over the next year or so, can you comment on how those renewal discussions are going with tenants? And maybe where you expect to see occupancy trend over the next year?

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

Sure. We got about 800,000 square feet of leases coming to maturity next year, of which one of our largest tenant, one of our top 10 tenants is responsible for roughly 300,000 square feet. We are well underway, finalizing the negotiations for the renewals of these 2 locations for 300,000 square feet, one of which is being papered as we are speaking. So if you remove, we have another large tenant who -- under negotiation. So if you remove these, it becomes sort of a normal year as far as lease renewals are concerned. And we don't anticipate in next year to have a lot of departures as far as our tenants are concerned. So right now, we reported a 76% renewal rate as of Q3, a cumulative renewal rate of 76%, which I think is a very good number, and I think we're going to end the year north of 76%.And -- but for next year, I think that we can forecast at least 80% of lease renewals from these tenants. So the message is basically 300,000 of the 800,000 is already addressed. Then you have a few lingering. And so a normal year would be 400,000 square feet of lease coming to maturity, and we would be right smacking into this. And yes, we do -- as we report, and we continuously report the fact that we do conclude lease renewals for -- in 2021, for 2022 and subsequent years. And we like to report on this in order to show that number one, we're on the ball. And number two, we're making sure that if there are preemptive measures to put in place that we do in order to keep our tendency.

[Operator]

And at this time, there are no further questions. Please go ahead, Ms. Leonard.

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

Thank you very much for joining us this morning. As you can see that our results are improving since Q3 2020. The purchase of these life-science and technology properties are testimony for our ability to source and execute on accretive acquisitions. The -- our leasing velocity is improving. We're noting that in Ottawa and in Quebec City, it's back to business as usual. And as I mentioned earlier, our process for capital recycling is going to continue over the next years in order to right size the portfolio and concentrate into 2 segments, not leaving behind the possibility of creating value on our retail assets. So with this, I thank you for your trust. Thank you for your following, and thank you for participating in our conference call this morning. And we'll be very pleased to report on our Q4 numbers in early 2022. So thank you very much, and we'll see you soon.

[Operator]

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