BTB Real Estate Investment Trust

TSX:BTB.UN

Earnings Call Transcript

[Operator]

Good morning. My name is Jessa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust Fourth Quarter and Year ended December 31, 2017, Financial Results Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of BTB Real Estate Investment Trust to be materially different from those expressed or implied by such forward-looking statements. The risks, uncertainties and other factors that could influence the actual results are described in BTB Real Estate Investment Trust's management discussion and analysis of financial result 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 call is being recorded. Thank you. I will now turn the conference over to Michel Léonard, President and Chief Executive Officer; and Mr. Benoit Cyr, Vice President and Chief Financial Officer. Mr. Léonard, you may begin your conference.

[Michel Léonard, President, CEO & Trustee]

Thank you very much, and good morning to all. I'll start by going through the highlights, and Benoit will delve into the details of our results for Q4 and for the year ending on December 31, 2017. I think the main highlight of the year was the fact that we saw our -- an increase in our occupancy rate from 90.5% to 91.4%. And if you will remember, our occupancy rate on Q1 2017 was 89.5%. So these leasing activities were, for us, record leasing activities. We renewed 591,000 square feet, leased 526,000 square feet. So the total of our leasing activities is more than 1.1 million square feet. Because of our record leasing activities, we saw a slight decrease in our net cash flow operating activities, and Benoit will explain those. We saw our net income increase by 27%, an increase in our total asset value due to our acquisitions, and I'll speak about the acquisitions, bringing the number to $762 million. An increase in 8.8% in recurring FFO from $17 million to $19 million, affected obviously by the issue of $25 million of units. Our strategic repositioning, we did well on that front. We had put 9 properties on the market, we sold 7. In 2017, per se, we disposed of 3, gross proceeds of $11.5 million: the Des Sources property, the Saint-Martin property and the Thibeau property. And after the year-end, we did dispose of our head office on Crescent for $3.15 million, our Drummondville property for $3.075 million, our Trans-Canada Highway property at $5.65 million, and our Marleau, a very, very small property, for $490,000, located in Cornwall. With that, we turned around and proceeded to acquire certain properties. As you saw, we spent -- we invested, I should say, not spent, $94 million, purchased the F.X. Sabourin, a big box retail shopping center, at $23.2 million. In St-Laurent, a suburb of Québec City in Levis at $35.9 million, and purchased 2 properties in the Technoparc Montréal at $35.1 million. The dispositions and acquisitions are definitely in line with our goal to reposition our portfolio and, obviously, evolve to better properties. Our strategic repositioning is definitely an ongoing process. We will be putting other properties on the market in order to increase the quality of our portfolio. As I mentioned, 2017 was definitely a challenging year regarding our lease renewals, and we met the challenge. And our revenues from renewals, per se, increased by 5.6%. Throughout the year last year, I talked about our leasing activities and certain problematic buildings. 1001 Sherbrooke, no longer a problematic building for us. We definitely crossed the 70% mark of occupancy. At 50 St-Charles, we began the year with 0%, and right now, we're slightly more than 50%. And we definitely believe that we will cross that 90% line in 2018. Aberdeen, again, another challenging property. It is located in Ottawa, where we saw the City of Ottawa lease 2 floors of the property. We leased 1.5 floors to Brookfield, another part of that forward to another tenant. And although this building was a challenging property, it is no longer a challenging property. Complexe de Léry in Three Rivers remains a challenging property. King Street West, we are active in the market. We were selected unfortunately not to retained for a large tenant. On Harvey and Saguenay, we still have 2 tenants that are expanding, and we saw our occupancy rate -- our occupancy increase by 4,000 square feet. In Complexe Lebourgneuf - Phase I in Québec City, we have a good velocity regarding leasing. There was 1 space on the ground floor that has not been leased for 4 years. We moved 1 of our tenants do that space, and the [ filet ] of the property is now available and it's just been made available in January of this year. Cornwall, that created a big hole in our occupancy rate last year when we saw a big lease maturing on May 31, 2017. That was 115,000 square feet. We re-leased 21,000 square feet to Ridgewood, 68,000 square feet to Stella-Jones and 18,000 square feet to ATS, for a total of 107,000 square feet. And at 2901 Marleau, where we had a vacant property, we concluded a transaction for 10,000 square feet with Wolseley. And we're left with 20,000 square feet still vacant in that property. With this summary or highlights of 2017, I'd like Benoit to delve into the details of our results.

[Benoit Cyr, VP & CFO]

Thank you, Michel. Good morning, everyone. I'm pleased to present and discuss our 2017 fourth quarter and yearly financial results. As mentioned, during the year, we sold 3 properties for a total consideration of $11.5 million. We used the proceeds of this sale to purchase the commercial property located in St-Hubert on the South Shore of Montréal for $22.2 million. Financed by a 15-year term loan of $15.1 million at 4.1% interest rate. We estimate this property will have a yearly NOI of $1.7 million. Then in November, we purchased a retail property, Carrefour St-Romuald, on the South Shore of Quebec City for $35.9 million, financed by a 10-year term mortgage loan of $23.2 million, bearing interest at 3.88%. And we estimate this property will generate a yearly NOI of $2.4 million. Finally, we purchased the 2 office properties in the Montréal Technoparc for a price of $35.1 million, financed by a 10-year mortgage loan of $23.1 million at 4.1% interest rate. And we estimate these 2 properties will generate a yearly NOI of $2.4 million. To complete these acquisitions, we raised, in October, $25 million of capital, 5.6 million units at $4.55 per unit. We estimate these acquisitions will contribute to increase our annual distributable income, FFO and AFFO, by around $0.015 per outstanding unit. At the end of December, our portfolio consisted of 73 properties, representing 4.5 million square feet of rentable area, and adding a market value of approximately $751 million. Then after year-end, we sold an additional 3 buildings for a proceed of around $12 million, and we bought a small new retail property beside our Plaza Delson retail center for $1.9 million. For the quarter, rental revenues were up 8% or $1.5 million compared to the same in 2016. But this increase was offset by the lower in-place occupancy rate in recent quarters compared to the same in 2016, so that on a yearly basis, our total revenues were stable compared to 2016. Several spaces, as mentioned, have been since leased and will start generating rental income in Q1 and Q2 of 2018. We've recorded an increase in our operating expenses of 14% or $1.1 million between the fourth quarter of '16 and the fourth quarter of '17. Acquisitions contributed for approximately half of this increase, and we invested a significant amount in preventive maintenance in the last quarter. For the entire fiscal year, operating expenses were up 5.6%, most part of this increase being due to recent acquisitions. Our NOI is up at 3.4% for the quarter, compared to the same in 2016, and is down 2.3% for the entire fiscal year. Financial expenses are up [ from ] $4.1 million to $4.8 million, or approximately 17%, and they are down from $21.4 million to $18.8 million or 12% for the entire year. Please remember that in 2016 -- 2016 had been affected by the write-down of certain financial assets related to the Series B debentures in the amount of $1.1 million. We've also accounted a fair market value increase of $591,000 for our swaps at the end of the last quarter for a total increase of $1.1 million for the entire fiscal year. This increase of value is recorded as a reduction of financial expenses and is due to recent increases in interest rates in Canada. Our average weighted contractual rate of interest on mortgage loans is now at 3.72%, 7 basis points lower as of the end of last year. And the weighted average term of our mortgage loans is 6 years and 5 months, 6 months more as a year ago. Our trust administrative expenses are at $1.1 million for the quarter compared to $1.2 million last year, and are at $4.3 million for the entire fiscal year, same as last year. To appraise our portfolio, at the end of the year, we used external valuations for a large portion of our portfolio. The 10 largest and approximately the 1/3 of the remaining properties are externally appraised. In addition, some other properties have been independently appraised during the last 2 quarters as part of financing or refinancing process. At the end of December '17, 71% of the fair market value of our portfolio have been appraised by external valuators. We so recorded an increase in value of $10.9 million, of which $2.3 million was recorded to reflect the selling price of properties sold after year-end; $6.6 million was recorded on 4 major properties, for which 2018 budgeted operating results are significantly increased compared to 2017; and lastly, a $1 million increase was recorded -- $1 million increase was recorded in -- for a property following a decrease of its cap rate in Ottawa area. The weighted average cap rate of the entire portfolio is at 7.05% as of the end of December '17, compared to 7.20% a year ago. We present a net income of $15.5 million for the quarter or $0.33 per unit compared to $9.1 million in Q4 '16 or $0.216; and $28.2 million for the year, $0.645 per unit, compared to $0.221 or $0.573 per unit for 2016. The same property NOI for the quarter shows an increase in its revenues, as previously announced earlier this year, but shows the NOI and the net property income decreases due to mostly the preventive maintenance expense during the last quarter. Following challenging leasing activities during the last few months, we expect the same-property portfolio to show neutral results for the first quarter of 2018 compared to 2017, and then a small NOI increase in Q2 and for the following quarters. Our distribution increased from $4.4 million in Q4 '16 to $5.1 million in Q4 '17, and from $16.4 million for the entire year 2016 to $18.5 million for 2017. And it included 12.4% of our distribution in units under our DRIP. Our distributable income for the quarter amounted to $4.9 million or $0.105 per unit compared to $4.4 million and $0.12 per unit in Q4 '16. And for the year, our DI amounted $0.452 per unit compared to $0.517 in '16. Our distribution payout ratio now stood at 93.7% compared to 83.4% in '16. As for the FFO and the AFFO per unit ratios, we attribute decreases in the DI per unit for -- to 3 factors: first, as mentioned, the higher preventive maintenance cost invested during the last month of 2017; second, to the issuance of 5.6 million units in October as -- and the timing effect between the receipt of the proceeds and their allocation to accretive acquisitions; and third, to the portfolio's effective occupancy rate that was lower in '17 than in '16, and 180,000 square feet of leasable area are actually -- were under firm lease agreement at the end of December and will start generating income in the next few months, and will so improve significantly these ratios. Our FFO reached approximately $4.9 million for the quarter compared to $4.8 million last year, 3 -- $0.103 this quarter compared to $0.114 last year per unit. And for the year, the FFO reached $19.3 million, $0.441 and $15.7 million and $0.465 last year. Finally, our AFFO amounted $4.4 million, $0.093 this quarter compared to also $4.4 million last year, but $0.107 per unit. On a yearly basis, we produced $17.6 million of the AFFO compared to $17.4 million last year, $0.403 this year compared to $0.457 last year. Our balance sheet presents investment properties at fair market value amounting $751 million compared to $645 million last year. We had $1.9 million in cash and other assets amounted to $9.4 million. We spent $4.3 million in recoverable and nonrecoverable CapEx during the quarter. Also, we spent $7.4 million in TI to meet the specific needs of our clients as well as the commissions paid to brokers. Our important leasing activities during the last months, the decrease of our vacancy rate and the increase in revenues of our same-property portfolio explained the important amount spent this year in leasing fees and leasehold improvement expenses. Mortgage loans payables amounted to $431 million at the end of December and were at $384 million last year. Our mortgage loan-to-value ratio is now at 56.5% compared to 59.1% at the end of last year. We have 2 series of debentures outstanding for a net book value of $49.7 million. This Series C should be redeemed -- or could be redeemed as -- at April 1 of this year at their principal amounts, but for now, it's not our intention to do so. And at the end of December, we were using $18.1 million on our 2 lines of credit. We used the net proceeds of the recent sales of properties to reimburse partially our lines. And as of today, we used $13.2 million in -- on our 2 lines of credit. Our -- all our mortgage loans coming to maturity last year have been renewed and we're already in discussion with lenders to refinance and renew those that are coming to maturity this year, which represents approximately $57 million. That's all for my section. I would like to thank you for your attention, and we'll now turn it back the conference to the facilitator for questions from analysts.

[Operator]

[Operator Instructions] Your first question comes from the line of Fred Blondeau from Echelon Wealth Partners.

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

First, maybe I missed this, but could you give us more color on these preventive maintenance CapEx mentioned in the MD&A?

[Benoit Cyr, VP & CFO]

Well, the quarter -- when you finish the year, you look at your budget and the amount spent in the last quarter. And we add the remaining budget available to spend in our property, and we so decided to do -- to invest a bit more to close the year in our budget.

[Michel Léonard, President, CEO & Trustee]

If I can add something, Fred, as you're aware, when -- we're operating with net leases for the good chunk of our leases, and when we see that we would have to -- that we would have charged in 2017 a little bit too much to our tenants, and hence, in the early portion of 2018, we'd have to reimburse our tenants for the amounts that they would have overspent. What we decided to do was to forward certain expenses for these buildings so that we would book these expenses at the late part of 2017, so that the actual expenditures would be carried on in 2017 and not in 2018 where we would have had to re-bill our tenants. Tenants don't like to have a yo-yo effect on their 13th invoice, and they like to see it more on a regular basis. They don't like surprises. And therefore, we decided to spend these monies in order to make sure that we would have a flat return on the 13th invoice for 2018 regarding the year 2017.

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

And if I remember well, the same thing happened for Q4 '16, right?

[Benoit Cyr, VP & CFO]

Yes, but...

[Michel Léonard, President, CEO & Trustee]

Not to the same extent.

[Benoit Cyr, VP & CFO]

Yes, exactly.

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

And you mentioned we should expect same-store NOI growth of approximately 1%, I guess -- 0% to 1% for 2018?

[Benoit Cyr, VP & CFO]

Sorry?

[Michel Léonard, President, CEO & Trustee]

The SP -- the same-property...

[Benoit Cyr, VP & CFO]

Yes, yes, yes. Well, we expect it's going to be neutral in Q1, but it start -- it will start to increase in the following quarters, yes.

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

So 0 to 1%? Or 1% to 2% for the year?

[Benoit Cyr, VP & CFO]

The first quarter will probably be neutral. After that, 0 to 1%, and probably by the end of the year, around 2%.

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

Okay. And your AFFO payout ratio increased quite a bit, but you mentioned that strong leasing activities should help improve the situation there. What should we expect in terms of the payout ratio at the end of this year?

[Benoit Cyr, VP & CFO]

Around 90% and probably below 90%.

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

From 105% at the end of this year to below 90%?

[Benoit Cyr, VP & CFO]

Yes, in the last quarter, yes.

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

Okay. And in terms of your recycling program, what do you expect this year? Is there much to be done there still?

[Michel Léonard, President, CEO & Trustee]

We're looking at putting on the market certain properties that we own in Sherbrooke. So as I made the market aware is that we are basically trying to get out of smaller markets in order to concentrate in larger markets, either in the province of Quebec and the province of Ontario. So we're looking -- we've basically a beauty contest with the different brokers in order to put these properties on the market. And so certain of these properties are going to hit the market within the next month. So we're talking generally between 4 to 6 Sherbrooke properties.

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

Okay. And did you have any updates on Cornwall and Thetford Mines redevelopment projects?

[Michel Léonard, President, CEO & Trustee]

The Cornwall, regarding development, everything is quiet. On the contrary, what we have is demand for just to rejuvenate the property that's located at the corner where we see that there's some traction in the market. So as far as repositioning that property, I think it's going to be an investment in the property in order to make it more appealing. And so nothing there. And in Thetford Mines, we put the property on the market, and we're just -- it's very quiet on that front. And hopefully, we're going to be able to get a deal going eventually.

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

Okay. And it looks like Trans-Canada is stabilizing or is stabilized at the moment. What would be the stabilized cap rate on this one?

[Michel Léonard, President, CEO & Trustee]

No, we sold Trans-Canada. When we put in place the lease, the tenants had an option to purchase and could exercise its -- the options purchased within a certain delay. And just before Christmas, they exercised their option, and the transaction occurred the later -- I think it was the latter part of January. And as I mentioned earlier, the proceeds from that sale were $5,650,000.

[Operator]

[Operator Instructions] Your next question comes from the line of Matt Kornack from National Bank Financial.

[Matt Kornack, Analyst]

Quickly, with regards to the 180,000 square feet of space that you have committed leasing-wise, how does that come on over the next couple of quarters? And will it all come in 2018? Or is there a portion that's in 2019 as well?

[Michel Léonard, President, CEO & Trustee]

There's nothing in 2019. It's all 2018, and 2018 in the first and second quarters.

[Matt Kornack, Analyst]

Okay. And is any of it currently being accounted for in the straight line rent? It looked like it was up a little bit sequentially? But do you early recognize any of it or no?

[Benoit Cyr, VP & CFO]

No, no. Only if you are in occupancy, but none -- most of them are not in occupancy right now.

[Matt Kornack, Analyst]

Okay. And then with regards to occupancy, you have had a positive move up over the last few quarters. In terms -- but there's still -- it sounds like there's a spread to committed versus in place. In terms of where you see this going by the end of the year, should we expect sort of 92%-plus occupancy? And have asset sales aided the occupancy figure because you've sold some properties that were lower levels and will acquisitions help?

[Michel Léonard, President, CEO & Trustee]

Well, the -- I'll tackle the second part of your question first. The Thibeau property that we sold has a low occupancy number, and the Drummondville property has a low occupancy number. Whereas the Des Sources was almost full, the Saint-Martin property was almost full. Crescent, we don't have to talk about that one, and Trans-Canada, almost full. So there are some -- obviously, there are some properties that are more challenging than others that are slated for sale, but we do have to put in leasing activity in order to put them on the market. And that's basically 2 properties: 1 at 560 Henri-Bourassa and 81 Turgeon in Sainte-Thérèse. So those are the 2 difficult properties where we do have leasing activities that have to take place in order for us to benefit from the sales in the market. Whereas, the first part of your question, we do anticipate that our occupancy rate for 2018, we're going to finish the year north of 92%.

[Matt Kornack, Analyst]

Okay, no, that makes sense. And there were some significant moves in the mixed use in the industrial portfolio, but it sounds like that may have been related to some of the divestiture activity?

[Michel Léonard, President, CEO & Trustee]

Yes, it could have very well be, yes.

[Matt Kornack, Analyst]

Okay. And nothing material in those markets, per se. I guess, the one final question on occupancy, is there anything major coming up this year that you're worried about? Or in terms of renewals, where do you expect retention to be? It's been sort of in the 50% to 70% range. Is that a typical number? And are you essentially going to backfill it with new leasing to get to that 92% figure?

[Michel Léonard, President, CEO & Trustee]

I think that this year, we have 10% of our leases that come to maturity, which is more of a normal year. And last year, it was 15%. That was definitely abnormal. And as I mentioned earlier, we -- our team definitely met the challenge, the leasing challenge, and even more than anticipated. So the -- there's 1 major expiration in 2018, which is, again, in Cornwall, where one of our tenants is leaving for -- and basically merging its operation somewhere in Toronto. And so that's 68,000 square feet, for which we have -- we're negotiating an offer to lease with a new tenant coming in. But aside from that large expiration, that's probably the major one for 2018. So basically, what we're doing is that we're filling our properties in order to get to an occupancy rate that is north of 92%.

[Matt Kornack, Analyst]

Okay. On the renewal spread this quarter, it was a bit lighter, but it follows on 2 very strong increases in Q2 and Q3. Is the total year figure of around 7%? I believe it was sort of indicative of where you believe rents are market-wise versus in-place at this point.

[Michel Léonard, President, CEO & Trustee]

We definitely believe that we can achieve better than 5% for 2018.

[Operator]

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

[Michel Léonard, President, CEO & Trustee]

Well, thank you for joining us this morning. I think that the nice surprise for the year was our occupancy rate. And so the increase in our occupancy was the fact that we're repositioning our portfolio, I think that gave us a strong base to start 2018. The decisions that we made in 2017 are definitely bearing fruit, and as a result of this, our numbers are starting to show a definite advantage versus the prior years. So with this, I'm really happy to close the year on this positive note of increased occupancy, and as Benoit mentioned, this increased occupancy is going to be reflected in our numbers for Q1 and forward in 2018. So thank you very much for joining us this morning, and hope to see you in the coming months. Thank you very much.

[Operator]

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