PRO Real Estate Investment Trust

TSX:PRV.UN

Earnings Call Transcript

[Operator]

Good morning, and welcome to PROREIT's Third Quarter Results Conference Call for Fiscal 2024. [Operator Instructions]. For your convenience, the results release along with the third quarter financial statements and management's discussion and analysis for fiscal 2024 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 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, levels of activity, performance, goals or achievements or other future events or developments. Forward-looking statements are based on information currently available on 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 estimates 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 on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated November 13, 2024, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as at November 13, 2024, and except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statements, 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 isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the third quarter earnings release for fiscal 2024 and non-IFRS measures section in the MD&A for third quarter of fiscal 2024 for additional information. I'll now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT.

[Gordon Lawlor, executive]

Thank you, Verso. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary; and Zach Aaron, our Vice President of Investments and Asset Management, is also joining us for the Q&A period. I will start with an overview of our performance for the third quarter of 2024. Alison will then provide a more detailed review of our financial results. I'm pleased with our overall progress as we advanced our strategic priorities in line with our ambition to become a pure-play industrial REIT in Canada. During the quarter, we continued to strengthen our portfolio through accretive opportunities while managing our balance sheet soundly. In September, we disposed of 2 previously announced legacy office properties in Ottawa, totaling approximately 163,000 square feet for gross proceeds of $26.6 million. Proceeds from these 2 dispositions were used to repay $18.7 million in related mortgages at a rate of 6.64%, with the balance used for general business and working capital purposes. In September, we also completed the previously announced acquisition of 100% interest in an industrial property strategically located next to the Montreal International Airport. The property totaling approximately 134,000 square feet was purchased for gross proceeds of $32.6 million. It was financed through a new $21.2 million mortgage at a rate of 5.1%, with the remaining balance funded by proceeds from the sale of previous noncore properties and a draw on our operating facility. September 30, 2024, our portfolio included 116 properties, compared to 126 at the same date last year. Both periods include our 50% ownership interest in 42 properties. Our industrial segment accounted for 85.6% of our GLA, up from 81.3% a year ago. With 4 office properties remaining in our portfolio valued at less than $30 million, our office segment accounted for only 2.5% of GLA. In October, subsequent to quarter end, we completed the sale of a noncore retail property located in Alberta, totaling 11,000 square feet for gross proceeds of $5 million. Net proceeds were used to repay $3.4 million of a [ unrelated ] mortgage with the balance allocated to repaying a portion of our line of credit and general business purposes. I'm pleased to highlight that we continue to benefit from steady organic growth. In the third quarter of 2024, we achieved an 8.1% increase in same-property NOI or an increase of 4.4% when excluding the impact of a temporary property vacancy in 2023. This marks 15 consecutive quarters of same-property NOI growth with an average annual growth rate of over 3%. From an operational standpoint, our strategic focus on small and mid-bay properties continues to demonstrate its value, consistent with market stats. For the third quarter of 2024, Canadian vacancy rates remained low at 2.5% for small bay and 3.5% for mid-bay spaces compared to an overall industrial vacancy rate of 4.3% for JLL Q3 stats. In terms of geographic focus, Halifax, where we're one of the leading industrial landlords, experienced the strongest rent growth in Canada again this quarter according to CBRE's Q3 Canadian industrial market stats. CBRE also reports that Halifax was the only market to see year-over-year decline in sublet with no sublet space available for Q3 '24. At September 30, 2024, the weighted average in-place rent on our industrial portfolio was $9.05 per square foot, an increase of 10.2% compared to the same date last year. To date, we've successfully renewed or replaced 83.6% of our GLA maturing in '24 and 38.5% average spread across the entire portfolio and a robust 50.4% for our industrial properties. For our overall GLA maturing in 2025, 27.3% has already been renewed at an overall positive spread of 26.7%. As mentioned on our last call, for 2025, we secured a lease for 128,000 square foot space with a new quality international tenant for a 15-year term with annual rent steps and base rent in excess of 30% over the expiring lease. That lease starts in February 1, 2025. At September 30, 2024, our portfolio occupancy rate stood at 97.2% compared to 98.2% the same date last year. Decrease in occupancy is primarily due to 3 industrial spaces totaling approximately 100,000 square feet as transitional vacancy in Woodstock, Ontario, a property in Halifax and one in Montreal. We continue to have leasing momentum on these spaces. I'll now turn the call over to Alison for a more detailed review of our financial results. Alison, over to you.

[Alison Schafer, executive]

Thank you, Gordy, and good morning, everyone. We are pleased with our third quarter results achieved while owning 10 fewer properties compared to the same period last year. Property revenue for the third quarter amounted to $24.0 million comparable to the same period last year. This is due to the change in the number of properties in our portfolio, partially offset by contractual rent increases and higher rental rates on lease renewals and new leases. Net operating income increased by 1.5% from $14.1 million to $14.3 million due to these same factors. Net cash flows provided from operating activities decreased to $9.9 million compared with $11 million in the equivalent quarter of last year, largely as a result of the timing of cash receipts and the settlement of payables. FFO reached $6.5 million for the quarter, relatively flat year-over-year as higher debt settlement costs related to the property sales were offset by general increases in contractual base rent, higher rates on renewals and new leases. Our basic AFFO payout ratio was 97.7% in Q3 compared to 96.9% last year, resulting from an increase in stabilized leasing costs, partially offset by general increases in contractual base rent and higher rates on renewals and new leases. Since the start of the year, we continue to manage our balance sheet prudently. We efficiently recycled capital and increased our holdings in quality industrial properties. Our liquidity position remained healthy with $24 million available through our credit facilities in addition to $10.7 million in cash at September 30, 2024. Our total debt, including current and noncurrent portions, totaled $501.1 million at September 30, 2024, a reduction of $18 million compared to the same date last year. We maintained our debt to gross book value on target at approximately 50% at the end of the quarter, which is comparable to the same date in 2023. Our weighted average interest rate on mortgage debt was 3.87% at September 30, 2024, compared to 3.76% at the same date last year. We had $2.4 million of remaining mortgage expiring in 2024, and that mortgage was renewed this week on market terms. The weighted average cap rate for the portfolio was approximately 6.7% at September 30, 2024, up from 6.1% at the same date last year. Finally, we maintained our distributions of $0.0375 per unit for each month in the third quarter of 2024. Gordy, back to you for closing comments.

[Gordon Lawlor, executive]

Thank you, Alison. Although the Canadian industrial market continues to face some temporary headwinds, particularly in the larger metropolitan cities, our strategy to focus on light industrial in primary and secondary markets has proven beneficial. We remain actively engaged in seeking the right opportunities while managing our balance sheet with discipline. As we approach 2025, we're well positioned and committed to advancing our long-term goal to reach 90% industrial base rent and creating additional value for our stakeholders. Finally, I'd like to conclude by thanking the entire prorate team for another quarter of solid execution. That concludes our remarks. And then, over to you for the Q&A.

[Operator]

[Operator Instructions]. First question comes from Gordonwin Hafyard with TD Securities.

[Gordonwin Hafyard, analyst]

Just on my first question, on capital recycling, nice to see more progress on the disposition front. I wanted to ask what you're seeing today in the transaction market and maybe how that outlook has changed in recent months. And now that you've been -- or now that you've made good progress on deleveraging, do you expect to maybe a bit more -- be a bit more active on the acquisition front?

[Gordon Lawlor, executive]

It's Gordy. I'll start and maybe Zach can chime in. But as far as acquisitions, so we sold $71 million this year. That gave us some room for the acquisition that we just did. We're trying to stay around our 50% leverage amount here and hoping to trend it down in the next couple of years. So unless we have some more acquisitions, which we've got a few discussions ongoing in that we probably wouldn't -- we'd only have some other acquisitions if we had other dispositions, put it that way. Zach, do you just want to comment on the market as far as buyers and sellers?

[Zachary Aaron, executive]

Yes, sure. I would describe it as still quite choppy in terms of the transaction market. I think we had a period perhaps over the summer, end of summer where the things started to stabilize and bid-ask spreads started to kind of narrow a little bit. And then since kind of the election noise and interest rate noise, bonds have kind of jumped up again, and there feels to be more uncertainty out there where I think vendors have perhaps now retreated once again with the hopes of kind of just waiting it out to '25 at this point. So there are still deals out there being marketed on and off market, but we're still really not seeing any larger sizable portfolio deals on the market coming from institutional vendors right now.

[Operator]

Next question comes from Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Maybe just starting on the transaction discussion there. Just from a disposition point of view, is there anything else we should expect in terms of what you're planning to get done this year? Or is it more about thinking about dispositions for next year?

[Gordon Lawlor, executive]

Yes. I think you probably wouldn't see any more at the end of the year. We've got a couple of smaller deals that we're working on, but they wouldn't close until the new year. Yes. And as far as next year, we don't have a need to dispose of well-performing assets or anything like that. As you know, we've been calling some of our single-tenant pharmacy stuff that we had out West that was part of our 19 asset portfolio. We've been doing that. We got some one-off deals here and there, a couple of potential sales with our JV partner in our JV that we have with Crestpoint, although they're small assets. There's still an office asset left in that group and a small -- like very small retail asset. So those kind of things we're looking at. Zach and the group, we identified $40-plus million of potential sales for next year, but that will depend on pricing and just the sense of the market. So we'll just be cognizant of that. But I mean, we did $71 million this year. When we look at the portfolio, I think we're like $110 million left in retail and under $30 million in office. So this -- I kind of get a kick out of this rewriting to get to 90% cash flow or whatever. But at the end of the day, we'll sell assets when we're happy with the price and then go from there. being mindful of our payout, obviously, as well.

[Bradley Sturges, analyst]

I guess with those retail assets, there's still some debt term on those assets, too. So I guess it's also a function of when debt maturities come up to, correct?

[Gordon Lawlor, executive]

Yes, exactly. Like there's about $25 million of assets that are retail that the debt is due in '25. So, obviously, we're going to look at those and rather than renew or renew on a short-term basis or something like that rather than put long-term money on them. So that's really what's driving the $40 million is 2 or 3 smaller assets and then about $25 million of bigger assets that the debt is coming due.

[Bradley Sturges, analyst]

Okay. Maybe switching over to leasing, just looking at your lease maturity schedule, is there anything that stands out at the moment in terms of non-renewals you're expecting?

[Gordon Lawlor, executive]

As far as in the next 2 quarters, no, we haven't -- I mean, Zach's been working on renewals for '25. So there's nothing there other than like we've got 100,000 square feet this quarter in 3 spaces. So that's -- if we've talked about it before, 39,000 square feet in Woodstock, Ontario, one of our better buildings down there. We got another 29,000 square feet here on the island of Montreal. Zach's got a couple of offers on that space right now. So we'll probably have something for the next time we chat on that. And then in Halifax, there's 30,000 came up this quarter, which is half of the 60,000 square foot building. We own jointly with Crestpoint. That building we bought ourselves back in 2021. It's about 10 Bonito drive actually is the address, but in Burnside. We only put 3-year money on it back then because when we bought it, the tenant, the single tenant occupier was interested in buying it. So they actually left in July, and we didn't negotiate a deal with them to buy, but another tenant came in, owner user came in. So we've got a tentative offer on that building. So that will likely be sold in -- probably close Q1. Like I said, it's in our JV. We only own half of it, but that was kind of one that we always had targeted that -- the potential sale. And that would be at a significant premium to what we bought it at back in '21. And then looking out, we don't see anything until -- I mean, there's still some things we're working on for Q3 of 2025, but Q1 and Q2 are pretty solid.

[Operator]

There are no further questions. Please continue.

[Gordon Lawlor, executive]

Okay. Well, thanks, everybody, that did attend, and we'll have -- we'll be talking to you, I guess, next quarter, everybody, happy holidays. Thanks very much.

[Operator]

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