BTB Real Estate Investment Trust (BTBUN) Earnings Call Transcript & Summary

Good morning. My name is Sylvie, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust's 2020 Third Quarter conference call for which management will discuss the quarter ended September 30, 2020. [Operator Instructions.] Should you wish to follow the presentation in greater details, management has made a presentation available on BTB's website at BTB -- I'm sorry, www.btbreit.com-investorrelations-quarterlyandannualmeetingpresentations. After the speaker's 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 public, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. A number of important factors could cause BTB Real Estate Investment Trust's actual results to differ materially from the expectations expressed or implied by 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 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 is being recorded. Thank you. And now we'll turn the conference over to Mr. Michel Leonard, President and Chief Executive Officer and Mr. Mathieu Bolte, Vice President and Chief Financial Officer. You may begin the conference.

Thank you, Sylvie, and welcome to our Q3 2020 conference call to the market. Although the pandemic continues to create uncertainty in our industry, our portfolio is definitely showing normalized results compared to the previous quarter. As you remember, during the Q2 2020, we had to take some charges that were reflected in our results. And in Q3 2020, no such charges were made. We have not been victims of any additional exposure to the industry's bankruptcy in Q3, so we haven't been notified of any such bankruptcy nor of any tenants that we're filing for bankruptcy in Q3 nor during the month of October. Our rent collection stood at 100% for the period of May to September; most of the subsidies from the federal government-related to the CECRA program have been collected by BTB to date. We maintained a good level of activity for lease renewals and we did secure new tenants for our properties. We successfully issued the Series H 7% convertible debenture, and we did, in fact, redeem the Series F that came -- that was coming to maturity in December 2020. The payout ratio is right now at the expected level, following the adjustment of the distribution announced in May of this year, and the book value of BTB right now is at $5.41. Our highlights, our committed occupancy is 92.1%. It's been affected slightly if you compare it to Q2 as a result of the bankruptcy that was announced in Gatineau Quebec of 23,000 square feet that was impacting us on Q3 2020. This is the only element impacting us regarding our committed occupancy. Our NOI has grown by 0.8%. Our FFO per unit is at 10.9 cents. We did renew for the year-to-date, 736,000 square feet of leases that came to maturity. And -- or will be coming to maturity, and our debt ratio is below 60%. Regarding our COVID efforts, BTB is still is -- is [forced] in place and we actively monitor and we implement -- we finalized the CECRA program, and we did file the request with the Quebec government in order to get the subsidy of 12.5%; so half of the amount that we had to eat under the CECRA program. The new federal program was announced for commercial tenants, and we're navigating through this new program. We established a protocol for our rental and accounts receivable collections, and we obviously are monitoring our cash flow and our operational expenses. With the implementation of the CECRA program, some rent deferral agreements were granted and we implemented the deferral agreements with some tenants that did not qualify for the CECRA program during Q2. And regarding Q3 2020, no additional res deferral agreements were concluded with any of our tenants. As of Q3 2020, a total of 86 applications were filed for our tenants claiming $1.9 million from both levels of government and the only outstanding amount right now is $507,000 to be collected in Q4. On October 2, the Quebec government announced the claim guidelines regarding its 12.5 grants, and we have to-date filed all of our applications. We're confident that all sums will be received during the month of November and so that at the end of Q4, there will be no outstanding amount to receive from the Quebec or the federal program. And the same-property NOI was positive for the -- for Q3 2020, although we were negatively affected in Q2. So the negative aspect of Q2 has been resolved in the sense that we're showing a slight improvement in same-property NOI. And important to note is the fact that we showed a little bit more than $8 million in accounts receivables in Q2, and the amount has been reduced in Q3. So a good -- a great effort in collection has been made by our personnel. So regarding our rent collection in the month of March was 96%, April, 92%; May, June, July, August and September, 100%. The rent collection continues to strengthen over Q3, and we're currently back to normal levels. The collection rate was adjusted to consider rent deferral agreements as well as rent subsidies receivable under the CECRA program. Our strong collection effort has helped us to reduce the balance of receivables to a normalized level, and this is an improvement of $3 million as compared to Q2, as I mentioned earlier. Regarding our leasing and renewal strategy, the lease renewal flow was again important for -- we renewed leases in Q3 for 58,000 square feet of lease expirations for 2020. So it's 63% renewals for the quarter. Year-to-date, we renewed 202,000 square feet, almost 203,000 square feet, boasting a 66% success rate. We've also tackled, and you'll see that in our presentation, we have divided the 2020 lease renewals with the 2021 lease renewals in order to show the activity that we're not only thinking of lease renewals for 2020, but we're also tackling 2021 and subsequent years. So for 2021 and subsequent years, we've already renewed 144,000 square feet during the quarter. And year-to-date, it's 307,000 square feet of lease ex-maturities occurring after 2020. So a total of 203,000 square feet in the quarter and year-to-date, 510,000 square feet were renewed. What's an important thing to note is the fact that out of the 58,000 square feet of lease renewals during the quarter, 38,000 were lease renewals concluded with retail tenants. So regarding the retail segment, we've not received, again, any notice of nonrenewal during the quarter due to the pandemic. We are deploying continuous efforts in order to renew our leases that are coming to maturity after 2020. And that is to ensure the stability of our portfolio and our year-to-date leases representing approximately 307,000 square feet were already renewed for maturities occurring after the end of 2020. Our average rental rate of renewed leases is up by 1.9%. We're seeing an increase in the industrial segment by 5% and in the retail segment by 2.3%. In the new leases that we concluded, we leased 173 -- 174,000 square feet of vacant spaces during Q3 for a total of 225,000 square feet leased to new tenants year-to-date. We -- one point that's important to note is that we concluded two major industrial leases. One is 80,000 square feet in Montreal, we had decided that we were basically canceling the lease of one of our tenants, canceling the lease means eviction. So we elected one of our tenants for 80,000 square feet. And within two to three weeks later, we concluded a new lease at an increase in net rent of $2 a square foot with a tenant occupying the whole 80,000 square feet. We also concluded a lease for 75,000 square feet in our property in Cornwall, Ontario. That property was a property slated under development. So we reclassified this property and it is now upward leasing, but it is fully leased. And we're seeing an increase in activity in the -- in September and October in the office segment, especially in suburban office segment where we do have some vacancy, but we're seeing that there's -- the market has picked up, definitely picked up in that segment. So regarding our capital allocation, we did an acquisition early this year of Queens view drive. We talked about it in Q2. And we did dispose of four properties since the beginning of the year. The last one was 560 in [indiscernible]. It was a property that was 60% occupied. It did not generate a whole lot of NOI for BTB, hence, the decision to sell this property. We obviously tried to reposition we were unsuccessful in the repositioning, hence, the decision to settle. So again, the repositioning of our portfolio has paid off. We're no longer in secondary markets. We're basically in Montreal proper, Quebec City proper and Ottawa proper. So on this basis, I'd like to turn over the conference to Mathieu, who will dwell in the details of our third quarter financial results.

Thank you, Michel. Good morning, everyone. So I'll refer to the conference call presentation that we have on our website. So I'll start on Page 11. As we dive into the financial results with our key financial metrics and the run rate. Net income, as Michel mentioned, was at $5.76 million compared to $5.63 million in the same period in 2019. And so this is an increase of $0.1 million. And the increase was primarily attributed to; first, an improvement of the NOI margin of 56.2% last year compared to 56.4% this year. As well, a reduction of the net financial expenses coming from the refinancing that we did during the last 12 months. Strict management as well as administrative expenses. So we've been careful. This is excluding the expected credit losses. And finally, no fair value adjustments of our portfolio was made during this quarter. So, so far, most of the impact of the pandemic were recorded in the previous quarter. So you can see the improvement across all the financial metrics. With no additional bankruptcies announced in the third quarter, the results are mainly impacted by four tenant bankruptcies announced in the second quarter with roughly $400,000 impact on the top line and $300,000 of impact of additional allowance for credit losses this quarter. So overall, the impact for the quarter related to COVID is about 1.4 cents on FFO and AFFO. Payout ratios are now normalized for a full quarter impact after the announcement of the distribution adjustment in the middle of the last quarter. On Page 12, so we show slight decreases in rental revenue and net operating income, respectively, of 1.6% and 1.2%, and this is really driven by the recent sales of the properties that Michel mentioned; the CECRA program and the Q2 limited bankruptcies. Year-to-date revenues are up 3.6% and NOI is up by 4.8%. Just on a comparable basis, revenues and NOI are both up 0.8% for the quarter. And excluding the COVID-19 related impacts, if you look at the nine months cumulative, same-property revenues would be at plus 4.5% and plus 6.7% for the NOI. We believe those COVID impacts were a more specific rate for the second quarter. Same as the previous quarter, we see the region of Ottawa, showing good stability, really made impact related to COVID. And Quebec City, that was a bit more affected in the previous quarter is now kind of in a recovery mode, and the top line has been stable for this quarter. So for the whole portfolio, the average rental rate of expired and renewed leases year-to-date has shown good increases for the industrial segment by 5% and for the retail segment by 2.3%. Moving on Page 13. FFO per unit was 10.9 cents, up from 10.8 cents for the same quarter last year. Our FFO was 68.6% versus the same quarter last year of 97.2%. So this is an improvement of about 29% on a payout basis. So compared to the previous quarter, the FFO increased by 3.4 cents per unit or $2.2 million to a total of $6.9 million. And as communicated, we believe the impact of Q2 were very specific for that quarter, and we're back to a more normalized trajectory in terms of revenues and credit losses. AFFO for the quarter was equal to last year at 9.7 cents per unit and our FFO payout ratio was 77.4% versus 107.8% in the same quarter last year. So overall, for the year, the impact of COVID-19 on FFO and AFFO, we analyzed it at 3.9 cents per unit, with the principal drivers being $0.6 related to the CECRA program, 2.2 cents for the allowance for expected credit losses and 1.1 cents per unit for the second quarter bankruptcies related to the four tenets. Next, on Page 14. The weighted average interest rate was 3.61% compared to 3.92% for the same quarter last year. So it's an improvement of 31 basis points. We continue to benefit from the current low rate environment in our re-tenancy and during the quarter. So this quarter, we managed to refinance $28 million at positive rates. Our debt to gross book value was 59.7% compared to 61.4% a year ago. So it's down 1.7%, and we still maintain the objective to stay below 60% for the total debt ratio. And the mortgage debt ratio was 53% compared to 55% a year ago. Just looking at liquidity at the end of the third quarter. So we stood at $42 million. So we have $33 million in cash and $9 million available under our credit facility. But out of the cash balance, the $26.7 million was reserved for the repayment of the debenture Series F maturing in December this year. So just to finish with Page 15, our commitment for the rest of the year totaled $58 million. And as mentioned, we have $26.7 million that was the outstanding Series F debentures due in December this year. And we announced on September 29 that we closed above deal public offering of $30 million Series H, a 7% convertible unsecured subordinated debenture maturing on October 31, 2025. So the net proceeds was used to repay the Series F, and we already did it. So on October 26 and for other general trust purposes. So as far as the debenture, the refinancing is completed. We only have two mortgages left to refinance this year for a total of $31 million, and we are in the process to just finalize them in due course. So with that, I would like to turn the call over to Michel for his closing remarks.

We'll ask questions first. So Sylvie, , could you open the line to analysts, please?

Certainly. [Operator Instructions.] Your first question will be from Fred Blondeau at IA Securities.

And it's IA Securities, obviously. First, I was wondering if you could give us a bit more color on the occupancy decrease within the mixed-use segment. Was that that like 550 bips decreases, was that the eviction that you were talking about, Michel?

No, no it was -- it's the bankruptcy and Gatineau of [indiscernible] for 23,000 square feet that was announced during Q2, but that hit us in Q3. So it's only -- it's mainly that.

Okay. And could you --

If I can add? If I can add, we've already signed a lease for half the space, a temporary lease, like I don't want to brag about a long-term lease, but it's a temporary lease for half the space.

Okay. And so what's the action plan there?

The action plan is that I think that this is the property that we should put on the market in 2021.

Okay. Perfect. And could you expand on that eviction that you were discussing earlier?

We leased the -- So we leased -- we were under a lease with a company, I won't mention the name, but they leased 80,000 square feet. And they were playing a game with us of paying rent and not paying rent, paying rent, not paying rent and so on. And so we had to -- we did provide in our results for the amount that was owed. And during the three months of the pandemic, where the Quebec government has not declared that you could not evict a tenant. But this gentleman thought that during this period, we could not evict. But considering the difficulty that basically, the whole market was under, we were patient. But as soon as things return to normal, we decided to cancel the lease. So we unilaterally canceled the lease. They left. So obviously, [ baliff ] and all that stuff. They left. And two to three weeks later we re-leased the space to Metro Logistics. And we had a lift in the net rent by $2 a square foot.

And so these guys less and there won't be any consequences or no consequence.

No. No, consequence, no.

Okay. Perfect. Second question in regards to same-property NOI. It looks like it held up quite well in Q3. I was wondering if you could give us a bit more details on how each segment performed.

Well, what you saw is basically, we had the mixed-use segment that contributed negatively. And the mixed-use segment was greatly affected in Q2 by the lease renewal that we concluded with Desjardins in Quebec City in a mixed use property. And I'll just open a parenthesis, the mix -- unfortunately, this property is really, in my book, it is an office property, and it's been categorized as a mixed use property. But we're -- in Q4 or Q1 of next year, we're going to invest time and effort in order to better define what a mixed-use property is. So I'm closing the parenthesis. But -- so it's an office tenant, Desjardins, where we concluded a lease renewal where we reduced their net rent for the lease renewal. And the basic understanding with them is that they renewed on the basis of an as-is, where is transaction. So we -- and there was no package that was attributed to the transaction. So there was no TI, there was no free rent. There's nothing. So it was a pure transaction where we concluded it at $2 per square foot less than what we were operating under. So that impacted us, if I remember correctly, by 9% in the mixed use property. So now what happens is -- or happened is the fact that through our leasing effort, now we're showing a positive NOI -- same-property NOI because we recuperated year-to-date, the effect of that lease renewal with Desjardins in Q2.

That's great. And how is retail performing in that environment?

We -- the only issue that we have with our retail is in the fashion segment. And as you know, most of our retail locations, we don't own and close malls. So most of our retail is open air type retail, power centers where their grocery anchor, we have drug stores, pharmacies and the like. So it's mostly destination based. And as a result, they were open during the forced closing by the decree of the government to close them. And so we didn't have -- we didn't suffer a whole lot, except in the retail -- in the fashion. And we're not heavily invested in fashion. So it's very few tenancy that we do have. And mostly, I would say, in Saint-Bruno and in Quebec City. And in Quebec City, that's where we were hit the hardest with that segment where we did postpone the payment of rent. And what we're seeing in Quebec City because now as a result of the postponement agreements that we have in place, they're reporting their sales. And most of the retailers in Quebec City that obviously report their sales are showing an increase in sales in 2020 versus 2019. So -- and the agreements that we had concluded with them is that if they -- obviously, if their sales were better than last year, then they were supposed to pay us the full amount of rent, which is the full amount of rent that's being collected. So it's a long answer to your question. But generally, that's where we're suffering, and it's basically fashion retailing, and we don't have a lot of those in our portfolio.

Any idea why Quebec City would underperform Montreal or other markets in that region? That's kind of --

It's -- you and I can eventually have a glass of wine, and we can discuss this. And I'll give -- I'll give you my impression of Quebec City versus Montreal as far as being [ beggers ]. But it's -- I think it's -- in Quebec City, it's a way of life, where they're sort of used to hold a hand out in order to receive something where -- in -- whether it's Ottawa or whether it's Montreal, the philosophy is completely different.

Be careful there. I was born in Quebec City, and I don't drink wine, but it's all good. And maybe lastly for me. You mentioned that you were seeing improving demand for office space within your suburban markets. Could you give us a bit more color on that?

Yes. We have a property in the Technoparc in Montreal, where if you remember, a few years ago, Shire left and created a vacancy, and we had a cancellation agreement that was signed with them, and we got the money and so on. And we had -- it was difficult to re-lease. Right now, there's a REM station being built right across the street from our property, and that's generating interest right now. So we're getting good velocity as far as leasing that property. We're getting good velocity on our office properties located in -- on Saint-Martin in Laval, great velocity of leasing there as well. We have a lot of leases that were renewed in this property as well. The City of Laval is moving into the building. So we finalized the construction of their -- part of their improvement for an occupancy that is going to take place over the weekend with the City of Laval. And there's another floor that they're taking over in a week or two -- no, more than that, in a month's time. So we're -- so there is good occupancy and same thing in Quebec City, where we're seeing tenants that are looking around. Obviously, in March, April, May and June, there was like very little activity, but now come September, we saw that there was a very positive aspect to the leasing velocity in our suburban office properties.

Next question will be from Matt Kornack at National Bank Financial.

With regards to the retail space that's seen CCAA filings, have you seen any tour activity on that? I know it's in close proximity to some pretty visible motorways. So any thoughts there?

We have -- you're referring to the Sportium building? Just -- I'll give a little bit of background. Sportium is part of the [ Sales ] group and Sale has filed for protection earlier this year. And so they have -- they will vacate this particular property on January 31, 2021. Right now, we're in -- we've received a letter of intent to re-lease that space. Obviously, we are preparing a counter offer for the documentation that we've received. So there is activity. We did give a mandate to an outside broker specializing in retail in order to lease this property as well to help us lease this property. And so we do have activity, and we're hopeful that we'll be able to lease it from this -- it's a Canadian national retailer that is looking at that space.

Necessity based? Or what type of usage would it be?

I would call it, let's call it, like it's not Canadian Tire, but it's like a Canadian Tire.

Okay. And then, Mathieu, with regards to the debt side of things on the mortgage front, it sounds like from your remarks that, that market has opened up a bit. And can you speak to the ability to get mortgage financing and how the underwriting has changed, if at all?

Yes. Well, we haven't faced any challenges in terms of refinancing, the mortgages that we have year-to-date. And as I mentioned, we have two less, one we already have an agreement with the bank. And then actually, the other one, we decided to go in terms of -- on the market to look at the best rates we can have on that specific property, which is a great property. So again, we haven't faced like really challenges in terms of refinancing.

Okay. And then last one for me. I guess it kind of jives with your comments with regards to the leasing velocity. But have you seen tour activity generally return to pre-COVID levels? And what type of properties? It sounds like suburban office, you're getting some interest in retail, the industrial market is exceptionally strong, but are there any areas that are outstanding on the positive or negative side with regards to tour activity?