PRO Real Estate Investment Trust

TSX:PRV.UN

Good morning, and welcome to PROREIT's First Quarter Results Conference Call for Fiscal 2025. [Operator Instructions] For your convenience, the results release along with the financial statements of the management's discussion and analysis for the first quarter of 2025 are available at proreit.com in the Investors section and on SEDAR+. Before we start, I have been asked by PROREIT to read the following message regarding the forward-looking statements and non-IFRS measures. PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements or other future events or developments.

Following forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such statements and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.

For additional information of the assumptions and risks, please consult the cautionary statements regarding forward-looking statements contained in PROREIT's MD&A dated May 14, 2025, available at www.sedarplus.ca. Forward-looking statements present management's expectation as at May 14, 2025, and expect as may be required by law. PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. The discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to and not as a substitute for or in insulation from the PROREIT's IFRS results.

For a description of these non-IFRS financial measures, please see the first quarter earnings release for fiscal 2025 and non-IFRS measures section in the MD&A for the first quarter of 2025 for additional information.

I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT.

Thank you, John, and good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary; Zach Aaron, Vice President of Investments and Asset Management, is also with us and will participate in the Q&A portion of the call. We're pleased to report that 2025 is off to a strong start. We continue to make meaningful progress towards our objective of becoming a pure-play light industrial REIT, focused on high-performing secondary markets in Canada. Before we turn to our first quarter results, I'd like to begin with an important announcement that we made earlier this week. We entered into an agreement to acquire a portfolio of 6 institutional quality industrial properties in Winnipeg from Parkit Enterprise, Inc. The portfolio totals 678,000 square feet of gross leasable area and is 99.7% leased with a weighted average lease term of approximately 4.2 years.

The total purchase price is $96.5 million or $142 per square foot with a capitalization rate in the mid-6% range. We expect the transaction to be accretive to AFFO per unit and to generate synergies through our management platform. The acquisition will be financed through a $63 million non-revolving credit facility and $40 million in PROREIT equity priced at $6.20 per unit to Parkit. This transaction also marks the beginning of a strategic relationship with Parkit to pursue further growth opportunities together. As part of the agreement, we've entered into an investor rates arrangement that allows Parkit to nominate one trustee to our Board. Upon closing, Parkit's Chairman, Stephen Scott, will join PROREIT's Board of Trustees.

This transaction significantly strengthens our presence in Winnipeg, expanding our small and mid-bay portfolio in the region to 22 properties and bringing our total GLA there to 1.3 million square feet. Upon closing, our total portfolio will consist of 118 properties, representing approximately 6.7 million square feet of GLA. The transaction is expected to close in the second quarter of 2025, subject to customary closing conditions. We're enthusiastic about the opportunities ahead and look forward to working with the Parkit team. Let me now provide a brief overview of our performance in the first quarter.

During Q1, we continued to execute on our strategy, delivering consistent organic growth and retaining a resilient balance sheet. Despite owning 8 fewer properties compared to the same period last year, our net operating income remained stable. Same-property NOI increased by 5%, driven by the strong performance of our industrial portfolio, which delivered 5.9% year-over-year. We also advanced our capital recycling strategy, allowing us to reallocate capital towards more strategic opportunities in the light industrial sector. In the quarter, we completed the sale of 3 noncore properties for total gross proceeds of $12.4 million. More specifically, in February, we sold a 50% owned property in Halifax for $5.4 million. Net proceeds were used to repay the related mortgage and for general business purposes.

In March, we completed the sale of 2 fully owned retail properties. The first located in Nova Scotia totaled approximately 52,000 square feet and was sold for $5.9 million. The second located in British Columbia totaled approximately 5,200 square feet and was sold for $1.1 million. Net proceeds from both sales were used to repay related mortgages and support working capital. From a geographic standpoint, our focus on strong secondary market continues to be a competitive advantage. At quarter end, 52.4% of our base rent was derived from Atlantic provinces. Halifax, where we're one of the top industrial landlords by square footage, was leading the market in the country in terms of rental rate growth in Q1, up over 19% year-over-year according to CBRE's Q1 Canadian industrial market stats.

Ottawa and Winnipeg, where we continue to expand follow closely behind. We're also pleased with the continued momentum in our leasing activity. To date, we've renewed 53.3% of our 2025 GLA at an average spread of 34.1% and 47.3% of our 2026 GLA at an average spread of 34.4%. These robust spreads underscore the embedded value of our portfolio and the quality of the markets in which we operate. At quarter end, the weighted average in-place rent for industrial portfolio was $9.92 per square foot, an increase of nearly 5% compared to the same period last year. Portfolio occupancy remained stable at 97.7%, including committed space. In February, Thales Canada Inc. began their 15-year lease for 128,000 square feet industrial space in Canada, Ontario, with a rent increase of over 30% compared to the previous tenant.

Thales Canada is now among our top 10 tenants. Also in February, we entered into a 39,000 square foot industrial lease in Woodstock, Ontario for a 1-year term with renewal options starting in May with a rent increase of almost 90% compared to the previous tenant. For our top 10 tenants, the remaining weighted average lease term is approximately 6 years, supporting long-term income stability.

With that, I'll now turn the call over to Alison to walk you through our first quarter financial results.

Thank you, Gordie, and good morning, everyone. We are pleased with our first quarter results and the continued strength of our operating performance. Despite owning 8 fewer properties compared to the same period last year, property revenue for the quarter amounted to $25.7 million, slightly higher year-over-year. This reflects contractual rent increases, higher rent rates on lease renewals and on new leases, offset by the reduced size of our portfolio. Net operating income or NOI for Q1 came in at $14.9 million, stable compared to last year due to these same factors. As Gordie mentioned, same-property NOI reached $14.1 million in Q1, up 5% year-over-year. This was largely driven by contractual rent increases, higher rental rates and higher rates on new leases.

Net cash flows from operating activities were $7.4 million in Q1 compared with $9.7 million in the same quarter last year, mainly due to the timing of cash receipts and the settlement of payables. FFO reached $7.9 million for the quarter, slightly higher year-over-year, driven by lower debt settlement costs, lower general and administrative expense costs and higher contractual base rents despite our smaller portfolio. Our basic AFFO payout ratio was 93.8% in Q1 compared to 91.6% last year. This change is mainly due to an increase in stabilized leasing costs and maintenance CapEx, offset by higher NOI once again despite owning fewer properties. The weighted average capitalization rate for our portfolio remained stable at approximately 6.7% as of March 31, 2025, compared to 6.6% at the same time last year.

During the quarter, we also continued to manage our debt prudently, strengthen our balance sheet and position ourselves to take advantage of value-creating opportunities. At quarter end, our total debt, including current and noncurrent portions, totaled $495 million. That's a $1.4 million reduction from last year. As of March 31, 2025, total debt to total assets improved to 49.3% from 50.0% at December 31, 2024. Adjusted debt to gross book value also improved to 49.5% from 50.3% at December 31, 2024. Looking at upcoming maturities, we have $41.9 million in mortgage maturities for 2025. In 2026, we have $142.8 million in maturities, primarily tied to well-performing industrial assets with upside refinancing potential.

The weighted average interest rate on these maturing mortgages is 4.8% for 2025 and 3.7% for 2026. In March, we secured $12 million in incremental financing from an existing lender in connection with an Ontario industrial property. The new loan carries a 4.98% annual rate and matures in September 2026, which is consistent with the original financing terms. Finally, we maintained our distribution of $0.0375 per unit for the first quarter of 2025.

With that, I'll now turn the call back to Gordie for closing remarks.

Thank you, Alison. We're pleased with our first quarter performance, which positions us well for the remainder of the year. The Parkit acquisition will meaningfully expand our presence in one of our core markets and strengthen our ability to pursue future growth. Despite ongoing market volatility and geopolitical uncertainty, we remain confident in our outlook and in the resilience of our platform. On the topic of tariffs, we've engaged several of our tenants and the consistent feedback is that while there's some uncertainty around the potential impact, most are continuing operations without major disruption. We continue to monitor the situation closely.

Looking ahead, we remain focused on scaling our industrial platform, supported by a strong balance sheet and a disciplined approach to capital deployment. Finally, I'd like to thank our team, our Board of Trustees and our unitholders for their continued dedication and support.

John, we're now happy to take questions.

[Operator Instructions] And we now have our first question. This comes from Sam Damiani from TD Cowen.

Gordie, just on the arranged the deal with Parkit, you mentioned it's a strategic opportunity with other options in the future. How should we think about how PROREIT is going to take advantage of that? What does that mean? Does that mean just taking more of their industrial properties over time? And if so, how much of their industrial portfolio would you view as strategic to PROREIT? But are there other ways that you're thinking of working with Parkit?

So, thanks, Sam. So, it's a bit of a one-sided discussion because they're not here. I mean, to us, they had $300 million of industrial properties, much of it in our areas, Winnipeg, Ottawa, Southwest Ontario and some in Quebec, a couple of assets in Quebec as well. Their piece of it, if you would ask them, is they're going to focus more on value-add opportunities go forward. And so, the stabilized assets, they looked interesting for us to manage on that basis because we have a full platform to manage our industrial and they actually did. So, the way to think about it is there's potential opportunities, I think, in Parkit assets today and maybe joint opportunities on other deals as we move forward. But it's honestly not much deeper than that at this point.

And just maybe on the debt maturities, Alison, you gave, obviously, the maturities and the rate looking at next year, how are you thinking about refinancing that debt? What month does most of it, does it roll? Just how you're thinking about that? It's obviously a low existing rate.

Sure. So, we're talking about 2026. So, we have a small chunk coming due at the beginning in the first 5 months of 2026. And then the balance is July all the way through to November. These are definitely strong performing industrial assets, and we don't see any issue on getting these renewed or refinanced, and there's definitely potential for up financing on these. In terms of rates and whatnot, I'll turn that to Zach because he's the one who's closest with this.

Sam, so yes, just high level, all the assets essentially coming due our industrial portfolio, we have our small bay in Ottawa, Winnipeg. We have assets in Moncton and some in our Burnside portfolio where we've only continued to see cash flows grow. Probably something we'll start to look at more seriously in the latter half of the year, just given that these don't mature until mostly until the second half of 2026. And given that a lot of those rates are going to be cost of kind of high 2%, low 3%. There's no real rush to go enter into today's market rents rates, I should say. And in terms of those rates today, the feedback from the lender market is constructive and that rates have been coming down. Bond yields have been kind of stable. If you look at the 5-year GOC around 270, 280 these days, it seems. And spreads have seem to come in as lenders get a little bit more hungry for origination.

So, if all things stays the same today, I would kind of expect things to land in kind of the low 4% to mid-4% range, talking about 5-year fixed rate money and a 65% to 70% LTV. So, looking ahead, we don't see any trouble in our maturities coming up. And like Alison said, we see a decent amount of upward financing available.

And then if I just step in, if you break it down, we've got basically 4 chunks with 4 different banks. So, $38 million with the bank on one of our larger assets, $500 palladium. So, we've just upward financed on that just in this quarter for $12 million. So, there's $38 million [Technical Difficulty] mentioned Winnipeg in Ottawa Small Bay. There's about $55 million with one bank there, which we're heavily engaged in on a regular basis. And then there's another $25 million on our Cisco properties, which we just extended the leases on. So, Zach is actually looking at some upward financing on those now. And we've already talked about what the financing would be available in 2026 for these assets. So basically, 4 banks that we deal with on a regular basis for the biggest chunk of this. So, we don't see really any issues there. No pulling any triggers really because most of it is around 3%, right? So, it'd be interesting to take some off the table, but then you look at it, it's like you're going to lose 150 basis points for that.

And I guess just a point of clarification. So, if a lot of it is around 3%, but the average for the year is 3.7% like the low-cost portion of that 2026 debt maturing is it more in the latter half of the year?

It's mostly May and July.

And the next question comes from Mark Rothschild from Canaccord.

Gordie, you guys had some really good leasing spreads and what you've been announcing what you've done already for '25 and '26, very strong numbers. When you talk about the accretion from the Parkit transaction, how does that factor into that with the growth that you're getting on future leases? Like would this be accretive compared to your current portfolio with the leasing spreads that you are getting?

Yes. Zach can expand on it. I think it would be -- it's both -- on an AFFO per unit basis, it's about 1% accretive on a leverage-neutral basis, which is the way that we look at it. It's more accretive non-leverage neutral. We've got basically 8% to 10% under market rent in the portfolio. But if you move one asset out, it's 13% to I think, 18%. So, in the first couple of years there, it's accretive. And then when you look when you're achieving the larger 7% to 10% growth there, it's out 3 years or whatever and who knows, but it's hard to find a portfolio that has the growth that we have in the 5-year model here. But as we look at it today, it's accretive in the first couple of years for sure.

And the next question comes from Brad Sturges from Raymond James.

Maybe just to start with the Parkit relationship and how to think about from your perspective and leveraging the internalized platform you have with Compass, do you see or foresee opportunities to enter into more formal agreements to manage some of the assets that they do have in overlapping markets and how that could translate into the higher fee income?

Yes. I mean we can look at that. We haven't talked about one managing on their behalf or anything, but that's why when we think of it as a potential opportunity, they have some assets there now where they have some third-party management. They're going to look at other transactions that might be helpful, whether it's portfolios that we split up in certain things if there's opportunities there. I mean just the full gamut of a group that owns 10% of PROREIT. So understands our portfolio and our management platform and what they can bring and then looking at those opportunities where kind of everybody can win out of the portfolio. So, it will be interesting to see -- the next couple of years are going to be very interesting in many, many ways. So, we have another group that's interested in looking at things with us. So, I think that's the positive of all of this.

Just I guess, switching gears, obviously, pretty strong same-property results. Given the rent spreads you're getting and some of the leasing you've done today on leasing up some of the transitional vacancies, just where do you think you'll trend from a same-property NOI growth perspective?

I mean we're at the 5% now. I mean we'd like to beat that hopefully. Zach has secured much '25 already here. And then as we roll into '26. It will just depend if we have any surprises or anything toward the end of the year. But effectively, the 5% plus would be a target for us.

And in terms of larger non-renewals, is there anything noteworthy at this point?

Well, there's one asset we have in Saint-Hyacinthe in Quebec. It's 176,000 square foot single tenant. The tenant was a long-term tenant, and they're not renewing. They've extended until July. And so, it won't affect Q2 or Q3, but unless we lease it up before Q4, there will be an effect for that asset on Q4. It's just off the island in Montreal, 176,000 square feet on the TransCanada Highway, nice asset, $4.50 rent. So, we're looking at opportunities with it now [indiscernible]. We've got an unsolicited offer for it that -- not sure how real it is. So that one will affect likely Q4 unless we solve it before then.

[Operator Instructions] And the next question comes from Zachary Zervos from CIBC.

Just on my first question here, looking at the acquisition pipeline, what are you seeing out there in terms of vendor appetite for units? Was this target acquisition a one-off? Or is that something you'd be interested in again moving forward?

I mean we'd look at them. Clearly, there's tax synergies for the seller here, whether private companies or other entities like Parkit. They're complicated transactions, like let's be clear. And the price that you pay for the assets versus what you'd like your stock to be at is this push-pull. So, we think in this deal, both groups made out very well to where we are with our stock price and what they got for the assets. I think kind of everybody won that way. They added significant value to some of these assets when they bought them in 2023. So, we'll benefit from that go forward. Yes, I mean the phone started ringing a little bit on these private deals the day after this announcement. It's just from my 15 years of this, it's tough to roll through it and get a price that we would be happy with for a stock and not overpay for the assets. I mean that's it at the end of the day, right?

Yes. That's great color. And then switching gears to the leasing front. I saw that you guys had a 39,000 square foot lease that was new at a sub-90% rate. And however, I also noticed that it was just on a 1-year lease term. So, was there any particular reason behind the short-term lease term? Or anything you're just seeing in the market that would show that moving forward?

Zach with some new gray hairs can respond to that.

Yes, sure. Happy to answer. So yes, it was the tenant who's coming into that space there in the steel industry. They're not directly impacted by the tariff noise going on because they're just a Canadian distributor. So, this facility was an expansion for them. They have a lot of customers out in Southwest Ontario and then going west. So, this location served really well for them from a distribution standpoint. And the 1-year deal was just their logic, which, again, we're kind of seeing more of it, especially the new leasing kind of part of the market, where there's a lot of hesitancy and a lot of hesitancy committing towards longer-term deals right now given the environment.

So, they were comfortable to do a 1-year deal, and we also included some renewal options in there in their favor to stay longer term. And they were kind of saying, we don't anticipate having to leave in a year. We just needed the flexibility. But most likely, assuming all this noise reduces, which it kind of seems like it's heading that way perhaps, it sounds like they will ultimately be a longer term. So, there's a bit of an advantage here where they're coming in at an attractive rate with no leasing cost on our end. And there's risk that they might leave after a year, but also the upside is that they might stay for longer term afterwards, and it didn't cost us very much to get them in there. So, we'll see is the answer for now, but they seem pretty confident that they'll be a longer-term tenant at the end of the day.

No further questions have come through. So, this concludes our conference call for today. Thank you all for participating. You may now disconnect.