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 BTB Real Estate Investment Trust's 2021 Fourth Quarter and Annual Results Conference Call for which management will discuss the quarter ended December 31, 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-investorrelations-quarterly and annual meeting presentations. After the speakers' remarks, there will be a question-and-answer period reserved exclusively for analysts. [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. Several important factors could cause BTB Real Estate Investment Trust's actual results to differ materially from the expectations expressed or implied for 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 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 call is being recorded. Thank you.I will now turn the conference over to Mr. Michel Leonard, President and Chief Executive Officer; and Mr. Mathieu Bolte, Vice President and Chief Financial Officer. Mr. Leonard, you may begin.

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

Thank you very much, Sylvie. We're very proud of our Q4 results where we reached important milestones. You saw our total asset value surpassed the $1.1 billion. And as far as our total revenues were concerned, we also surpassed $100 million in total revenues.During the quarter, we proceeded with certain acquisitions. So we acquired 2 Class A life science and technology office buildings located on Boulevard Alfred-Nobel in Montreal for $73 million. The properties consist, as I mentioned, of life science tenants that include Bristol-Myers Squibb for 60,000 square feet, Hewlett Packard for almost 30,000 square feet, ICU Medical for almost 50,000 square feet, Innomar Strategies for 27,000 square feet and Lundbeck Canada for 18,000 square feet. So these properties were acquired at a cap rate of 6.1%, creating an accretive acquisition for BTB.We also acquired close to Christmas a portfolio of properties located in Western Canada. And the properties are 9 industrial properties and 1 small office property and they're all located in Edmonton and Saskatoon. The total purchase price was $93.7 million. If we look at the different tenants that compose this portfolio, we have Ameco Services at 24,000 square feet, Drive Products at 30,000 square feet; EPCOR Water Services at 56,000 square feet; NCSG Crane for 36,000 square feet; Strongco, already a tenant in the portfolio of BTB at 37,000 square feet; Vicwest, almost 29,000 square feet; National Tire Distributors at 100,000 square feet; Wesco Distribution at 26,000 square feet, and CNH Industrial Canada at 36,000 square feet; and the last of the summary at Saputo for 20,000 square feet. So these properties also joined with the fact that we did acquire another industrial property in 2021, which is the Kieran property, 99,000 square feet for $15.3 million, as previously announced.As far as our continuous acquisitions, we also acquired 2 properties located -- after December 31. We also acquired 2 properties located on Bank Street in Ottawa, in the Glebe area, which is a very trendy area for Ottawa. The main tenants include Royal College of Physicians for 20,000 square feet; BMO Nesbitt Burns at 20,000 square feet; Canadian Internet Registration Authority at almost 20,000 square feet; Field Effect Software at 16,000 square feet and so on. So this acquisition, again, was an accretive acquisition to BTB. It's being concluded at a cap rate in place of 6.6%. We also -- as a subsequent event, we sold or disposed of our Cornwall properties, so 4 properties located in Cornwall for $25 million. And early December, we had disposed of a property on Lapiniere in Montreal and the South Shore of Montreal for $4.5 million.Our rent collection stood for the year at 99.1%. Our accounts receivable were stable through the year, and we returned to our pre-pandemic level as to the amounts outstanding on our accounts receivable. Leasing activity was incredibly again strong, so 2 years of strong results regarding our leasing activities. So during the quarter, we leased 378,000 square feet in lease renewals and 77,000 square feet of new leases that were concluded for a total of 455,000 square feet. Our occupancy rate stood at 93.4%, again, another high that was achieved by BTB through the quarter.Regarding our key financial and operational metrics, if you're following my presentation on Page 2. So we have $1.1 billion of investment properties. Our recurring FFO per unit stood at $0.421, our recurring AFFO payout ratio at 77.9%, our recurring FFO at $0.712 versus 87.7% in 2020, our total debt ratio was at 60.5%, and that includes a percentage of 3.2% that we used on our line of credit. The leasable -- the total leasable area was 6 million square feet. The renewals and new leases for the quarter at 41,000 square feet. Our committed occupancy, as I mentioned, at 93.4% and our rent collection at 99%.I'd like to remind everybody that regarding our retail property, we don't own any enclosed malls and our portfolio includes necessity-based retailers. We have increased our exposure to Industrial segment. And I'll discuss that a little bit later. And our largest tenants are investment grade, and we have a core market presence.Back to leasing and renewal activity. So we renewed for the year 803,000 square feet. And part of these renewals included long-term renewals with staple tenants such as Walmart, a total of 264,000 square feet were renewed with Walmart during 2021. Leases -- 2 leases with Staples totaling 46,000 square feet, a lease with Rossy for 26,000 square feet and Quebec City for 13,000 square feet. We did basically -- for Quebec City, the town of Quebec City leasing space in our property, we did, what we call, a blend and extend. So they increased the number of square feet that they lease from us, plus extended their term.We achieved a cumulative 5.5% average increase in lease renewals across all our business segments. So in office, we increased by 2.1%, in retail 7.5%, and in the industrial segment by 14.6%. We're finalizing the construction at our now Princess Auto property located on FX Sabourin. So if you remember, during the first quarter after the COVID, we suffered the bankruptcy of Sportium, and we had previously suffered in that property the bankruptcy of Ashley Furniture. And both were replaced, Sportium by Princess Auto and Ashley Furniture by Dek Hockey.And we're also waiting for Lumen - for the transaction to be firm with Lumen, which is a transaction that is conditional upon a slight modification of the zoning in order to accommodate the tenancy. So we're -- in this property, which was the worst performing property for BTB, we have stabilized it and the only vacancy that will remain is 4,000 square feet. In Q2 -- in Q1 2022, we are finalizing certain leases that were concluded in 2021 for a total of 90,000 square feet. So part of it is the different conditional leases that were put in place, one of which is a lease with Giant Tiger in Gatineau, Quebec for 26,000 square feet, where we need to make a change of zoning in order to have a firm lease for that property.We did the retail property review as we discussed during our last call. So we have 12 retail properties, and we have decided that we will dispose in an orderly fashion of 5 of these properties. And we also included in our review 2 office properties, and we've decided that we were going to dispose of 2 of these office properties, generating proceeds of about $60 million. So as I mentioned, the activity regarding the portfolio was extensive and important for 2021.If you turn to Page 4, you'll see that our weight of industrial properties has increased to 30% and we intend to increase our weight of industrial properties to more or to an equivalent at least to the office sector and thereby acquiring industrial properties focusing on industrial properties for the next year and in the future and reduce the weight of the retail properties. We've already announced that we were going to dispose of some retail properties this year and some office properties -- smaller office properties this year, thereby reducing our weight in the retail segment and increasing the weight in industrial properties. So our year-over-year increase in the occupancy is 1.2% overall, in the industrial sector, 1.2%; in the office sector, 0.4%; and in the retail, 1.8%.Our lease renewals, we increased the average lease renewal rate of 5.5%. And on a cumulative basis, industrial at 14.6% and the office segment at 2.1% and the retail segment at 7.5%. As I mentioned before, the investment activity, we are focusing our investment on industrial and suburban office with strong fundamentals, good pipeline of value creation and maximization of the value of the retail portfolio.When we are talking about the maximization of the value of the retail portfolio, as you saw in our highlights and the subsequent events, we have entered into an agreement to sell the densification rights in one of our retail properties. That will bring over the next 5 years roughly, I would say, more than $30 million of unlocked value of this center and thereby creating or realizing hidden value within our portfolio. So the $30 million that I just discussed has not been valued in or appraised as far as our total asset value is concerned. And we are going to make adjustments as this transaction is going to come to fruition, it being conditional inter alia of certain conditions, which include a change of zoning. So the disposition that we will conclude in the retail sector, as I mentioned, will be redeployed -- the proceeds will be redeployed in the Industrial segment.Our occupancy rate stood at 93.4%, and year-to-year increase of 1.2%. The Western portfolio that we acquired is 100% occupied. We had a short-term lease that was coming to maturity. And we knew at the acquisition that the tenant was not going to renew, and we successfully leased the entire property on a 10-year basis to a new tenant. And that new tenant will occupy the property as the previous tenant will depart. So there will be no effect on our occupancy rate as a result of that lease coming to maturity. Also regarding the Western portfolio, there is a tenant that approached us to do a blend and extend, and we concluded a lease renewal in anticipation of their renewal, thereby creating a firm 10-year commitment for the property. So we're still looking to acquire properties in Canada.With this summary, I'd like to ask Mathieu to dive into the details of our financial performance for the quarter and for the year 2021.

[Mathieu Bolte, VP & CFO]

Thank you, Michel. And Good morning, everyone. If you follow the presentation on our website, I'll be on Page 6 with the financial highlights. So I'll start on that page with the highlights for the year and for the quarter. So overall, we're pleased with the results and the good performance of our portfolio. So [ we take and ] really talked about the resilience of the assets across the 3 segments. And there has been a lot of discussion with COVID in general and the market. But for us, we haven't faced meaningful headwinds from the pandemic for the last 6 quarters.The NOI for the same property portfolio increased by 4.8% for the quarter and 6.9% year-over-year, explained by a combination of higher occupancy rate and increase in average lease renewal, Michel mentioned it about 5.5% for the year and additional recoveries that we were able to collect. Recurring FFO was $0.11 per unit for the quarter. So we must remember that we issued equity back in April. So at the time, we paid down our credit facility. We did the acquisition of an industrial property at the end of June, and we completed the 2 acquisitions in November, the 2 office properties and as well the $94 million acquisition of the Western portfolio at the end of December. Overall, in terms of the fair market value of the assets, we have an increase of close to $20 million. So we saw recoveries from our necessity-based retail assets and the overall strong performance of the Industrial segment.We are moving on Page 7 for the rental revenues and NOI, an increase of revenue of 19.3% for the quarter and 7.9% for the year. So we saw additional recoveries that we talked about in Q2 this year. And as well, we see the accretive acquisitions that have supported the growth. NOI increased by 15.7% for the quarter and 9.9% for the year. So just to keep in mind, on a run rate basis, the 2 Alfred Nobel acquisitions in November, that was done mid-November, we'll have a $1.1 million NOI per quarter and the 10 properties in Western Canada acquired in late December will have $1.6 million NOI per quarter moving forward. So that last transaction since it was done in the December 24 has a material impact on the financials for this quarter. Overall, NOI margin is up 100 bps compared to the last year.I'm on Page 8. Recurring FFO per unit $0.11, up $0.011 compared to the same quarter last year. And on a cumulative basis, FFO per unit was $0.421, up $0.038 compared to last year. The acquisition, as I said, of the last quarter will have the positive impact moving forward for FFO and AFFO. The AFFO payout ratio was 77.9% compared to 97.1%. So it's an improvement of 19 -- a bit more than 19% year-over-year. With the equity issuance and the debenture conversions, the weighted average number of units increased from 63.6 million units in Q4 last year -- sorry, Q4 2020 to 74.4 million units in Q4 2021.Looking at the capital structure on Page 9. So the weighted average interest rate for mortgages was 3.49% at the end of the year compared to 3.57% for the same quarter last year. So it's a decrease -- a benefit of 8 basis points with the refinancing that we did. But I think what's important to note as well is over 2 years, it's 43 basis points improvement for the average interest rates of our mortgage book. Total debt ratio at 60.5%, so it's a temporary increase of 4.7% since last year -- sorry, since last quarter and 1.1% compared to the same period last year. As Michel mentioned as well, last month, we completed the sale of the Cornwall portfolio for selling net price of $25 million for a net proceed of $19 million after paying down debt. And that's part of the strategy as well to reduce the outstanding amount of our credit facility and ultimately reduce the total debt ratio.On the Page 10, with the debt maturities. Moving to that page, we have a total of $74.4 million of mortgages that are coming due this year, for which already $25 million is being finalized. So overall, 2021, we have completed long-term financing of 22% of our mortgage portfolio and an average term of 6.94 years. So we were quite happy overall to see great appetite from the lenders for BTB's assets in securing long-term financing.Following the issuance, just a quick update on the debentures. So following the issuance of the Series H debenture in September 2020, we continue to receive conversion notices for $0.5 million this quarter and for a total of $7.9 million since the issuance. So it's about 26% of the debenture. Remember that the conversion price is $3.64 and the unit closed at $4.08 at the end of the year. So that completes our presentation. And with that, we'll move to the Q&A.

[Operator]

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

[Matt Kornack, Analyst]

Can you give a sense with the post-quarter transaction activity, plus the leasing that you've done, where you expect occupancy to trend? And also, give a bit more color maybe on how we should think about lease maturities in 2022 and the potential for mark-to-market on those.

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

We -- as far as -- we are very advanced in our lease negotiations regarding our lease renewals, and we don't anticipate this year to be hit by non-renewals from our tenants. Maybe in and out, we would expect perhaps at a maximum of 10% of non-renewal. And as far as leasing space, whether -- we can't talk about our industrial spaces because they're almost full. But as far as leasing space in our office environment, we're getting traction and we're hopeful that we're going to be able to resolve some issues that we do have in certain office properties.As far as our retail, you saw the retail segment itself. The major vacancy that we have in the retail segment is a space that we knew was going to be vacant when we acquired the property. It's an old [ deco ] space. And that was leased when we acquired it temporarily to a user. The user wanted to renew the lease with us on a long-term basis. But the rental rates that they proposed at the time were definitely not acceptable to us. And we prefer to see that tenant go, instead of renewing a lease at conditions that we didn't want to do. So -- and we are getting traction for that space. For the last year, we've been in discussion with tenants and brokers. And we strongly believe that during the year, that space is going to lease. And that, if you do the calculation, it's a substantial percentage regarding the retail environment.So as I mentioned earlier, our retail environment, whether they're grocery anchored or pharmacy anchored and the like, our destination based, we received proceeds or rent payments from these tenants throughout the pandemic. So what we've decided that we were keeping is basically properties that I called our coupon clippers. So why would we dispose of, say, a Shoppers location when we know that this tenant is going to continuously pay us -- and to replace that property with, say, an industrial property where there would be or could be additional risk.So on that basis, we decided to keep our coupon clippers and those that are not coupon clippers. So we've made the decision to sell in the ordinary course of business. So it's not going to be -- we're not going to go for a fire sale. We're not going to massively put them on the market. We're just going to go, as I mentioned, in an orderly fashion. So where we're basically -- and I think that our acquisition in close to Christmas of the industrial portfolio in Saskatoon and in Edmonton. I mean this is something that we definitely want to continue. We want to increase our ownership in the industrial segment, and we are going to. And we are discussing -- in certain discussions to acquire again industrial properties.So I don't know if I answered your question, Matt. But overall, in our portfolio, the portfolio doesn't show signs of major non-renewals for our leases.

[Matt Kornack, Analyst]

No, that's very helpful. On the industrial side and in terms of where you're targeting geographically for expansion, clearly Montreal has become an exceptionally hot market. But how about markets like Quebec City? Are there other sort of non-Montreal markets in Quebec that you'd look at and elsewhere throughout Canada obviously, I think you're going to remain in Canada at this point. But just how should we think about expansion of that portfolio? And then also, I guess, as a tangent to that, this portfolio that you acquired didn't take much in the way of management, but is that consistent? Or do you think you'll, at some point, kind of build a platform to manage trickier sort of industrial assets in these markets?

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

Well, I'll answer your second question first. We want to bulk up in those markets. So when it will warrant it, again, we are going to have boots on the ground. So right now, it doesn't want the warrant for us to have boots on the ground. However, as you saw from the different tenancies that we have in these properties, most of these properties, I can't say all, but most, 8 out of 10 are single tenant users with triple net leases and these tenants are self-managing these properties.We have been in touch with local property managers. And we've decided that for the time being, we're going to monitor whether we need a local property manager or given the nature of these properties, whether where we can manage from one of our offices. As a matter of fact, right now, the director that is managing these properties is located in our Ottawa office. So it's the head of Ottawa. So we do have direct relationships with our tenants. We establish that relationship, and it's going well so far. And the cost of managing through a third-party manager would not be stronomical. So we're monitoring. And if we do have to do so, we will hire a local property manager in order to do so.We do have opportunities -- continuously opportunities within these markets. But to answer your first question, where we want to purchase is in the major cities of Canada. So we don't want to go back to where we were in the smaller secondary or tertiary markets. We want the primary cities in Canada, and that's how we identify where we're going to harvest these acquisitions. So Quebec City is definitely a market where we want to acquire; Ottawa, it is a market where we want to acquire industrial properties. In the Ottawa market, it's a rarity, but this is a market where we want to acquire. So if you look at the largest cities in Canada, it's probably our target markets. We know that Vancouver, we can purchase. You've identified that in Montreal, it's a hot market. Toronto was a hot market. So -- and we are not shying away from our self-imposed obligation of having accretion from day 1 in purchasing properties.

[Matt Kornack, Analyst]

Last one for me on the retail dispositions. In terms of the timing of those, and I believe there was a component of those where they had repositioning potential. That's not in the retained coupon clipper ones? Or is that in those and will it eventually be executed on? Or is it in the ones that are being sold? And if that's the case, how are you going about maximizing the value on disposition given that potential density?

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

We're keeping -- where there's densification potential, we're keeping those. We want to realize the full value as the example that I have given regarding the conditional agreement that we have signed with a residential developer. We are looking at creating the same kind of scenario for the properties that we are going to retain. They are self-standing: Let's say, we do have a self-standing Shoppers Drug Mart location of 20-some-thousand square feet with no densification potential. Well, that's a coupon clipper. And even if there's no densification potential, we've decided to -- that it would remain in our portfolio. Those that we would be selling are those that are basically stabilized. They're good properties. They're definitely not bad properties. They're good properties, but they don't have a development or repositioning potential.

[Mathieu Bolte, VP & CFO]

And maybe just to add on that, Matt, the redevelopment is not property that we will assume a lot of CapEx, so it's not CapEx intensive. It's really based on -- principally based on air rights that we can sell. So I think it's important to keep in mind.

[Matt Kornack, Analyst]

And so I guess on the residential side there, that's going to be sold as the rental or condo and presumably, I guess, is it a partner that would come in and build it if that is the case.

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

The partner would come in and build it. Obviously an astute partner has been chosen with experience in the residential development. And the goal for us, as Mathieu has mentioned is that we're not looking to do it ourselves. We're basically selling the air rights, keeping in control of the site and ensuring that the value that we have now for the center remains and that the proceeds that we will receive from the construction of whether their rental or condo units is going to remain for us.

[Matt Kornack, Analyst]

Congrats on a strong quarter. You reached a lot of high watermarks on key metrics. So things are going well.

[Operator]

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

[Christopher Koutsikaloudis, Associate]

Actually my questions have all been answered, so I'll go outside of the queue.

[Operator]

[Operator Instructions] And at this time, Mr. Leonard, we have no further questions.

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

Well, thank you very much for attending this morning. Again, as Matt mentioned, we've hit very high watermarks, and we're very proud of it. And it's been 7 quarters in a row where we've built on this high watermark. Every single quarter for the last 7 quarters have been building on, we've been increasing our results, and we're very proud to present these very strong quarters. All our metrics have increased in the right direction. And as I mentioned, this trend started back in 2020 just before COVID hit when our stock was trading at, I think, higher than $5.50 per unit. So I think that Q4 2021 is a home run for us, and we want to keep it this way. We like where we are, and we are managing the business in order to even get better.So thank you for your attendance this morning. Thank you for following BTB and investing in BTB. We're proud of our results, and we want to continue on this line. We have improved our balance sheet, our ratios are showing healthy prospects for us, and this is what we were expecting, and that's what we want and we want to stay there. So thank you very much.

[Operator]

Thank you, Mr. Leonard. 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.