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's 2019 Fourth Quarter and Year Ended December 31, 2019 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 actual results are described in BTB Real Estate Investment Trust's management discussion and analysis of financial results and is in its Annual Information Form, which were 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 Léonard, President and Chief Executive Officer; and Mr. Benoît Cyr, Vice President and Chief Financial Officer. Please go ahead.

[Michel Léonard, President, CEO & Trustee]

Good morning. We are presenting to you today another solid quarter of BTB and a turnaround year for BTB. Our committed -- you saw, our committed occupancy rate is up 2.2% to 93.2%, slightly lower than the last quarter, mostly caused by Ashley Furniture that we previously discussed. But for the year, we recorded an all-time high in occupancy rate. More than 88,000 square feet are firmly leased and committed for future occupancy.As of the fourth quarter of 2019 and the first quarter of 2020, they will generate additional income, specifically related to the conclusion of leases with a new tenant at Brewer Hunt had come at 32,000 square feet that started paying rent in Q1. A new tenant on Saint-Martin Boulevard, which is the City of Laval; at least more than 20,000 square feet, Eventure on Migneron; our property on Migneron of 8,000 square feet. We leased a space in St-Jean-sur-Richelieu to the government of Québec for 7,400 square feet. And finally, Telus for the property on the ground floor of our Ste-Catherine property for 2,400 square feet.These leases were -- will generate on an annualized basis more than $1 million of net revenues. The biggest occupancy rate increase came from our office segment, where we saw a 4% increase in occupancy year-to-year. We're showing strong organic growth. There is a significant increase in average rental rate of our renewed leases of 5.5% as of December 31, 2019.During the year, we renewed more than 692,000 square feet of leases with a retention rate of 75.6%. And as mentioned, the average renewal rate increased by 5.5%.Of note, we renewed major leases with the government of Canada in Ottawa on our Walkley property and also renewed the lease for 100,000 square feet with Germain Lariviere in Laval, that was -- if some of you do remember, it was our qualifying transaction at the end of 2006. They've renewed their lease for another 10 years.The same-property portfolio increased by 5.8% for the quarter and 3.9% for the year. Again, a great recovery versus the first 2 quarters of 2019.As forecast during our last call, our FFO for the last quarter is below 100%, at 88.7% and after -- and our AFFO for the quarter was at 96.8%, generating, obviously, present positive momentum. Again, we're showing a decrease in our mortgage debt ratio that's now standing at 52.8%, and our total debt ratio is below 60%. We all remember that a few years ago, our total debt ratio was more than 70%.We did record an adjustment to fair market value of our properties of approximately 3% of our total property value. At the request of a tenant, Janssen Pharma, that lease space in our property located at 3111 Saint-Martin Boulevard, and we agreed to a cancellation penalty of $1 million. The space was immediately re-leased to an accounting firm, where we granted a small tenant allowance and a few months of free rent. There was no downtime as Janssen left one day, and the next day, the accounting firm moved in.We do have action on the space left behind by Ashley Furniture. We haven't leased it yet, but we do have interest for that property.During 2019, we did proceed with asset dispositions. So we disposed off 2 properties located in Delson, a property located in Saguenay. So the total dispositions that we did conclude generated net dispositions of 16 -- north of $16 million. We did acquire properties during 2019, 1 in Saint-Laurent, 1 in Saint-Hilaire and 1 in Saint-Bruno. And the total cash consideration paid for these acquisitions was north of $25 million.Our disposition program is almost completed. We still have the Henri-Bourassa property on the market and our Magog property on the market. We did dispose earlier this year after December 31 of our property -- industrial property located in Ingersoll for $13.3 million. The reason for the disposition is that the tenant had sent us a notice of nonrenewal. The lease ended -- was to end on December 31 of this year. And given the risk involved, we decided to sell it, and we were able to sell it at a very nice profit for the sale of this property.Same thing goes for the Cte-de-Liesse property, where we sold the property for $9.2 million, had acquired it just a little bit more than $7 million. And given the risk involved in the lease renewal for this single property tenant, we decided to sell the property.After the year-end, we acquired a property located in Queensview in Ottawa. And this property was purchased at a total purchase price of $21.8 million.So with my -- with this, I will turn the microphone to Benoît to delve into the details of our results.

[Benoît Cyr, VP, CFO & Assistant Secretary]

Thank you, and good morning. During this fourth quarter of '19, we did not sell or purchase any properties, but -- any property, but we, as mentioned by Michel, we did 4 dispositions during the year and 3 acquisitions. And after year-end, we also did 3 transactions, 1 acquisition and 2 dispositions. At the end of December, our portfolio consisted of 66 properties, representing over 5.7 million square feet and having a market value of approximately $939 million.To finance the acquisition we did during the year, we used the net proceeds coming from the sale of properties previously discussed. After paying back the related mortgage loans, and we used also our acquisition line of credit, which is, at the end of December, at $10.2 million. And we used a net proceed of unit issuance this last June, where we assumed a 6.2 million units at a price of $4.67 for net proceeds of $21 million.As explained in the MD&A, and as Michel mentioned previously, the following firm leases will take effect in the next quarters. 32,000 square feet with SatCom on Brewer Hunt in Ottawa that will generate an annual income of $733,000. 20,000 square feet with City of Laval in our Saint-Martin building -- boulevard property for an annualized income of $730,000. 8,200 square feet with Eventure on Migneron Boulevard for an annual income of over $100,000. And finally, the SUI on MacDonald Street and St-Jean-sur-Richelieu, a 7,400 square feet for an annual income of $160,000. And to this number, we may have Telus, who will move in shortly in our head office building, corner of Crescent and Ste-Catherine in Montreal, but will start paying rent in 2021. The estimated annual revenues for Telus is about $530,000. Total in the coming quarters on an annualized basis, $2.2 million of gross revenue.That being said, for the fourth quarter of the year, rental revenues were up 16% or $3.5 million compared to the same in 2018. And as mentioned, this amount includes a lease cancellation penalty received from Janssen in our Saint-Martin boulevard property in Laval. This amount has improved our net profit, distributable income, FFO and AFFO by approximately $0.017 per unit for the quarter and for the year.Purchased properties in '19 generated approximately $2.6 million of additional revenues during the quarter, while disposed properties in '19 generated an estimated shortfall of $1.9 million in the quarter. We recorded an increase in our operating expenses of 8.9% or $0.9 million between the fourth quarter of '18 and the fourth quarter of '19, mostly due to the net effect of acquisitions, over dispositions completed during the year.In fiscal '19, expenses are up -- operating expenses are up $2.9 million or 7.3%, and stay at 45.6% of rental revenue approximately the same as last year. Our NOI is up 22% or $2.6 million for the quarter compared to the same in 2018 and is at 55.5% as percentage of revenues. For fiscal '19, NOI is up $3.3 million or 6.8% from last year. Net financial expenses including fair value adjustments are down from $7.4 million to $5.6 million. We've accounted a fair value adjustment on our swaps and our Class B LP units at the end of December, resulting in a net revenue of $1 million in Q4 '19 while we've accounted a net expense of $1.3 million last year. These adjustments are regard following changes in interest rates in Canada from Q3 to Q4 and to the changes of unit price during the same period.For the entire fiscal year, financial expenses before fair market value adjustments increased 7.2% or $1.7 million compared to fiscal '18. Our average weighted contractual rate of interest on mortgage loans is now at 3.92%, 7 basis point lower as of the end of Q4 '18. And the weighted average term of our mortgage loans is just above 5 years. Our trust administrative expenses for the quarter are at $1.2 million approximately the same as last year and for the entire fiscal year trust administrative expenses totaled $5.5 million compared to $4.9 million for 2018, half of the increase being due to an increase in our compensation plans following changes in our unit price.At the end of the year, we used external charter evaluators to appraise a significant portion of our portfolio. The 10 largest properties and approximately 1/3 of the remaining properties are independently appraised. In addition, as part of financing or refinancing and at the request of lenders, other properties are independently appraised during the last months of the year.At the end of December, 63% of the fair value of the portfolio was subject to external independent appraisals and 37% was internally appraised. We used the capitalized NOI method and cap rates received from external experts to do in our appraisal -- internal appraisal.We so estimated that the value of our portfolio recorded in balance sheet at the end of December '19 needed an adjustment of $34.1 million to adequately represent its fair value. Last year, we recorded an adjustment of $22.1 million. Office properties account for almost 67% or $22.7 million of the portfolio's increase in value. This increase is mainly due to lower cap rates in Quebec and Ontario in this segment and to better NOI compared to last year.The Industrial segment was up $11.9 million, accounting for about 35% of the portfolio increase. The Industrial segment increase in value is due to compression of cap rates compared to last year.The weighted average cap rate of the entire portfolio is at 6.6% at the end of December '19, down 20 points from last year.We present a net income of $41.6 million for the quarter, $0.662 per unit compared to $24.4 million in Q4 '18 or $0.437 per unit. For the entire fiscal year, we present a net income of $51.8 million compared to $41.3 million last year.The same-property portfolio for the quarter shows an increase of its revenues, its NOI and its net property income of respectively, 4.4%, 3.0% and 9.9%. For the entire fiscal year, revenues of the same-property portfolio are up at 3.4%, while NOI is up 3.9% and the net property income shows an increase of 6.7%.Our distributions increased from $5.9 million in Q4 '18 to $6.6 million in Q4 '19, including 12.7% of our distributions in units under our DRIP. Our distributable income for the quarter amounted to $7.6 million, $0.119 per unit compared to $5.2 million and $0.093 per unit in Q4 '18.Our distribution payout ratio for the quarter stood at 88.1% from 112.4% in Q4 '18. As for the annual FFO and AFFO per unit, the annual decrease of our distributable income per unit was mainly recorded during the first 2 quarters of the year and the events that caused these decreases were largely explained at the end of these quarters and are now mostly resolved.For fiscal '19, distributable income amounted $25.1 million from $23.9 million last year, $0.42 per unit this year and $0.456 last year.Recurring FFO reached approximately $7.4 million for the quarter compared to $5.1 million last year, $0.118 this quarter and $0.091 last year. The recurring FFO payout ratio for the quarter stood at 88.7% from 115% a year ago.For the entire fiscal year, recurring FFO reached $0.407 compared to $0.45 in 2018, and the payout was at 103% from 93.3% last year.Finally, our recurring AFFO amounted to $6.8 million, $0.108 per unit this quarter from $4.6 million and $0.082 last year. The payout stood at 96.8% from 128% last year.On a yearly basis, we present a recurring AFFO of $0.375 per unit versus $0.412 last year, with a payout of 111.9% this year and 102% last year.Our balance sheet presents investment properties at fair market value amounting $924 million compared to $839 million last year. We had the $1.3 million in cash and other assets amounted $13 million, including a balance of sales of $6 million bearing interest at 7%.We spent approximately $2.6 million in recoverable and nonrecoverable CapEx during the quarter. And we also spent $1.2 million in TIs to meet the specific needs of our clients as well as commission to brokers.For the entire fiscal year, we spent $5.5 million in CapEx, of which $2.9 million were recoverable, and we spent $4.4 million in TIs.Mortgage loan payables amounted $493 million at the end of December compared to $471 million at the end of December '18. Our mortgage loan-to-value ratio is now at 52.8% compared to 55.8% a year ago. Our total debt ratio is down from 62.5% to 51.1% this year.In Q4, we issued the Series G debentures for $24 million, bearing interest at 6%. The proceeds were used to reimburse the Series E that was redeemed at the rate of 6.9%.We have so 2 series of debentures outstanding for a net book value of 14 -- $9.1 million. The Series F are now redeemable at their principal amount and they mature at the end of 2020.At the end of December, our acquisition line of credit was partially used in the amount of $10.2 million, and $2.3 million was used on our operation line.We have about $74 million of mortgage loans coming to maturity in 2020, of which $9 million have already been renewed and another $5 million will be closed shortly. We are under discussion with lenders to renew or refinance the balance coming due in 2020.That's all for my question (sic) [ section ]. I would like to thank you for your attention and turn -- and I now turn back the conference to the facilitator for questions from analysts.

[Operator]

[Operator Instructions] And at this time, Mr. Léonard, we have no questions registered. Please proceed.

[Michel Léonard, President, CEO & Trustee]

All right. Thank you very much. At the outset of my presentation, I forgot to tell the audience that we did have a computer glitch this morning in filing our documentation. It was filed at the very last minute, and we were contemplating issuing a press release to postpone our call to tomorrow as a result of the fact that they -- there was a glitch between our attorneys and SEDAR. That was in -- resolved in extremis at 9:30. So we apologize for the late filing, and it was an unfortunate event. And I think that the glitch has been resolved.One thing that I wanted to mention, and before I ask Benoît to make his presentation was to give you some color on Queensview. And so Queensview was a property that we purchased located in Ottawa, where we benefit of an excess land, where we could eventually develop an adjoining property to the site. The extra land is roughly 53,000 square feet. And right now, the current zoning, we understand could allow us to put up a 60,000 square foot office building. And the 60,000 square foot office building, as we also understand, is that there is some demand in the market.But regarding the property itself, the largest tenant is WSP as known in Canada for a little bit more than 48,000 square feet, which is the main tenant, and the WSP lease expires in 2027. Most of the leases in this property expire after 2025 with smaller tenants less than 5,000 square feet at 2025. And the other expiration that is longer is at 2030. So a great acquisition on that front.So now we stand at 66 properties, and the 66 properties are basically 5.7 million square feet, as Benoît mentioned. What is interesting to note is the fact that we have less properties but more square footage, which shows that our properties are, therefore, definitely larger and better -- and we managed to put together a better quality portfolio.So the -- also what -- as Benoît has mentioned is that these new properties are generating more revenues than the properties that we disposed of. Hence, the rejiggling, if I can call it this way, of the portfolio of BTB. And as I mentioned earlier, the portfolio is stabilized. We still have 2 properties to sell, but we're also aware that there are certain properties that we do own that could generate some interest in the market and on a 1 to 1 basis. We will decide if we're selling or not.So based on this, I thank you very much and apologize again for the late filing. And I'd like to thank you for your attention and your continued support of BTB. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.