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

Good morning. My name is Janus, and I will be your conference facilitator today. At this time, I would like to welcome you to BTB Real Estate Investment Trust 2021 Virtual Annual and Special Meeting of Unitholders. [Operator Instructions] The annual and special meeting will begin with the customer introduction by the Chair of BTB's Board of Trustees, the recognition of the quorum and the business of the annual and special meeting, including management's presentation. [Operator Instructions] Please note that questions submitted online can only be seen by BTB's management. Should you be connected by phone and wish to view the presentation, please go to BTB's website at www.btbreit.com-annualmeetingpresentation- to find the presentation link. Before turning the meeting over to BTB's Chair and management, please be advised that some of the statements that may be made during this annual and special meeting 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 management discussion and analysis of financial results 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. I will now turn the conference over to Mr. Jocelyn Proteau, Chair of the Board of Trustees; Mr. Michel Leonard, President and Chief Executive Officer; and Mr. Mathieu Bolte, Vice President and Chief Financial Officer. Mr. Proteau, you may begin your annual and special meeting.

Thank you very much. [Foreign Language] Good morning, ladies and gentlemen. [Foreign Language] My name is Jocelyn Proteau, Chair of the Board of the Trustees for BTB Real Estate Investment Trust, and I will Chair this meeting of unitholders. [Foreign Language] Welcome to the Annual and Special Meeting of the Unitholders of BTB Real Estate Investment Trust. [Foreign Language] This meeting will be held in both French and English. Please do not hesitate to ask questions in the question period immediately following the meeting. [Foreign Language] It is now 11:02, and I will start this meeting. [Foreign Language] I would like to introduce the persons who are present with me at BTB's head office. Michel Leonard, CEO; Mathieu Bolte, Vice President and Chief Financial Officer; Jean-Pierre Janson, Vice Chair of the Board; Luc Martin, President of the Audit Committee; Mrs. Lucie Ducharme, President of the Human Resources and Governance Committee; and Fernand Perreault, President of the Investment Committee. [Foreign Language] Please note that the other members of the Board of Trustees will be introduced a little bit later. [Foreign Language] I will now ask Martine Gauthier and Gale Demick of Computershare Investor Services to act as scrutineers for this meeting. [Foreign Language] A question period will be held after the vote on the various resolutions proposed today. Please note that only unitholders or their proxy may ask questions during the question period. If you have a specific question with respect to an item for your consideration on the agenda, please keep your question for that period. [Foreign Language] I have received an affidavit from Computershare confirming the transmission by mail to the unitholders of the notice of meeting, the management proxy circular and the proxy forms was duly made. I ask that such affidavit with copies of the documentation transmitted by mail to the unitholders be filed by the Secretary together with the minutes of this meeting. [Foreign Language] I will now receive a motion to waive the reading of the notice for this meeting.

[Foreign Language] My name is [indiscernible]. I am a unitholder and I propose that the reading of the notice for this meeting be waived.

Thank you. [Foreign Language]

Mr. Chairman, my name is [ Stephanie Leonard ], and I'm a unitholder, and I second this motion.

Thank you. [Foreign Language] We now have a duly seconded motion to waive the reading of the notice of this meeting. [Foreign Language] I therefore conclude that the reading of the notice for this meeting is waived. [Foreign Language] The contract of trust states that to constitute a quorum, unitholders attending the meeting either personally or by proxy must hold a minimum of 5% of the outstanding units. [Foreign Language] I have received a report from the scrutineers regarding the number of unitholders participating or represented by proxy as well as the number of units represented by their holders or proxy. [Foreign Language] The scrutineers have counted and confirmed that 558 unitholders are attending or represented by proxy for a total of 5,816,729 units, representing almost 8% of the outstanding units. [Foreign Language] Based on the report that I received, I declare that the quorum has been attained and this meeting has been duly called and constituted. [Foreign Language] Since this is a virtual meeting, only the votes received by proxies will be tabulated. [Foreign Language] The management discussion and analysis, the audited consolidated financial statements and the auditor's report for the fiscal year ended December 31, 2020, have been filed on SEDAR at www.sedar.com and have been presented to the unitholders. [Foreign Language] No vote or action is required with respect to these documents. [Foreign Language]

[Foreign Language] Thank you for participating in this meeting this morning. And it's with great pleasure that we will present our results of -- as of Q2 -- sorry, Q4 2020. First and foremost, I'd like to introduce the candidates that were presented to you as potential candidates to become trustees of BTB for the year to come. First, Jocelyn Proteau, who is acting as Chair of the Board of Trustees; Jean-Pierre Janson, the Vice Chair of the Board of Trustees; Luc Martin, who acts as the Chair of the Audit Committee; Lucie Ducharme, who is acting as the Chair of the Human Resources Committee; Fernand Perreault, Chair of the Investment Committee; and Sylvie Lachance, Trustee. A new nominee, as you saw, who is Daniel Fournier, who is the former Chair and CEO at Ivanhoé Cambridge, a real estate subsidiary of Caisse de dépôt et placement du Québec. [Foreign Language] I'd like to remind our unitholders, our mission. Our mission is to increase and maximize the value of our assets through the dynamic and responsible management with the goal of maximizing the total return for our unitholders. [Foreign Language] Value creation is by optimizing our asset value through dynamic management in order to create and maximize the long-term value of our properties. [Foreign Language] So our assets are now focused on in 3 areas: Montréal, Québec City and Ottawa, where Montréal has a little bit more than 53% of our assets, Québec City at almost 26% and Ottawa at almost 21%. And if you look at our breakdown by asset type, [Foreign Language] when we are acquiring properties, we're looking for lease -- tenants that have signed long-term leases in our properties. We're looking for a higher occupancy rate or a tenant mix that is well established such as governmental institutions or national or international tenants. If you look at the list of our top 10 tenants, we have BBA, an engineering firm located in Saint-Hilaire (sic) [ Mont-Saint-Hilaire ], Québec; WSP located in Ottawa; Intrado located in Saint-Laurent borough of Montréal; Walmart located in Saint-Bruno on the South Shore of Montréal and in Québec City in Lévis to be more precise; Lowe-Martin located in Ottawa; Strongco, we leased 2 different properties to Strongco, 1 in Québec City and 1 in Montréal in Laval; Germain Larivière, Germain Larivière was the first acquisition that BTB made, and we're pleased to report that we extended the lease term for Germain Larivière for another 10 years; Desjardins; the provincial government of Québec; and the federal government of Canada. During 2020, we did proceed with certain dispositions. [Foreign Language] We acquired, in 2020, 2 properties. So 2611 Queensview Drive, an acquisition that was concluded early in the year 2020. Our purchase price was $21.8 million for a gross rentable area of 77,000 square feet. [Foreign Language] The effect of dispositions and acquisition on our NOI and our liquidity. The different sales that occurred in 2020 represented an NOI of $2.2 million for a sales price totaling $36 million -- we had purchased -- sorry, we had purchased these properties for $36 million and sold them for almost $49 million. We turned around and acquired properties. So we acquired $1.9 million of NOI for a total purchase price of almost $30 million. And of the proceeds of dispositions of 2020, we still have roughly $20 million to deploy. And obviously, that's going to generate an NOI that is going to surpass the NOI representing the properties that we did dispose of. Unfortunately, we had to go through COVID in 2020, the same as everybody, our unitholders, Board members, employees, BTB and the whole world had to navigate through the COVID pandemic. We were -- we acted fast in order to ensure that BTB was not hit hard with the COVID. [Foreign Language] So we did analyze the request for rent abatements, and we had -- we have roughly 530 tenants, and generally, 80 tenants were looking for rent abatements or government subsidies. We establish internal protocols to minimize the impact on our operations. [Foreign Language] We did administer the CECRA program on behalf of our tenants in order to ensure that they would get the full extent of what they were rightly owed. And so same thing for us. So as Mathieu will discuss a little bit later, we'll talk about the effect of COVID on our results. So cash management became a focus point to navigate through the development of the pandemic. So we did negotiate with our lenders. [Foreign Language] We reduced our capital expenditures and tenant improvements that were not necessary. Management and the trustees did their best to defer part of their variable compensation, and we did reduce the distribution payable by almost 30% at the beginning of May 2020. And knowing that the question is going to come regarding the eventual increase in the distributions, we have not -- the Board of Trustees has not yet looked at this item, and it is something that we take very seriously, and we want to see how we are going to pull out of this COVID in order to analyze carefully the eventual increase in distribution. So we're navigated through the pandemic regarding our rent collection rate. [Foreign Language] Our overall collection rate from March to December, we were at 98.9%, so almost 99%. Perfection, I guess, does not exist. So we're short 1%. We did improve our balance of receivables in Q2 2020. Our balance of receivable was at $8.7 million, a very high amount. At Q4 2020, we reduced it to $5.2 million. And at the end of Q1 2021, the balance of receivables stood at $4.8 million. So a great improvement compared to the same period and also to the pre-pandemic period. When we look at our occupancy rates, the pandemic caused a decrease in our occupancy rate by 1%. And this was basically caused by bankruptcies and restructuring of 4 tenants that occurred in Q2 2020. Also, we decided not to renew a lease of 30,000 square feet with a retail tenant because they were asking us to commit on a long-term basis for a lease rate that was not market. And as a result, we decided not to renew that lease. So these bankruptcies and the unexpected departure of a 30,000 square foot tenant did impact our results. And Mathieu is going to go through it a little bit later in the presentation. But what is important to note is that we have no additional exposure to bankruptcy. So we had 4 tenants, as I mentioned earlier. And throughout the year for Q3, Q4 or Q1 2021, we had no additional exposures. [Foreign Language] So our occupancy rate as at Q4 2020 stood at 92.2%. [Foreign Language] So when we look at our occupancy rate per segment, office is almost at 90%, retail at 93.3% and the industrial space at almost 96%. During the year, we did put in place a leasing strategy that was important in order to sustain our numbers. So we did negotiate new leases during a time when a lot of experts were saying that it would be impossible to do. But we did contract 281,000 -- almost 282,000 square feet of new leases. We renewed leases for 836,000 square feet. And our total activity -- leasing activity stood at 1,118,000 square feet. So this is equivalent to 22% of our leasable area that basically turned during 2020. [Foreign Language] So sir, on this note, I would like to ask Mathieu to go through the results for Q4 2020 as well as Q1 2021.

Thank you, I'm on Page 29, if you follow the presentation. So we'll talk about the highlights for 2020. [Foreign Language] Even though BTB reduced its square footage by 300,000 square feet going from 66 properties in 2019 to 64 in 2020, the total asset value increased slightly from $924 million to $927 million. So BTB continued its strategy put in place in 2017 of disposing specific assets to improve the overall performance of the portfolio. So we entered the crisis with our plan almost 100% executed, which explains part of the resilience of the portfolio that we signed in 2020. [Foreign Language] The decrease in the committed occupancy rate from 93.2% at the end of 2020 compared to 92.2% in 2019 is mainly explained by 1 retail tenant departure that was occupying 30,000 square feet. And it's currently now in the process of renewal. Despite the financial difficulties that may have affected the retail sector during the COVID pandemic, BTB's collection rate maintained stable -- remained stable, sorry, at 100% at the end of 2020, as Michel mentioned. We finished the year with $92.9 million of rental revenue compared to $93.6 million in 2019. But despite the rental revenue decrease, the net operating income margin increased from 54.4% to 55.1%. On the next page, operating performance for 2020. As we mentioned, revenue went down slightly, but it can be explained by 2 different things. So first, we did work with our tenants to participate in the Canada Emergency Commercial Rent Assistance, so the CECRA program, that enacted to provide rental support to tenants, which was available during the period ranging between April to September 2020. Throughout the year, we successfully filed applications for approximately 80 tenants, which represents 15% of the leases managed by the trust. So at the end of the year, all subsidies were received. And the net financial impact of the CECRA program for BTB was $0.4 million, which is equivalent to 12.5% of the rents related to the program. So that's the net of what we were able to collect from the tenant and from the federal and provincial government. [Foreign Language] Also, Michel explained that numerous announced bankruptcies and restructuring in the retail industry had limited impact on BTB portfolio with only 4 situations for us, which the majority is now almost leased. [Foreign Language] For net operating income, the reduction of revenues has been compensated by $1.7 million operating cost reduction coming from productivity and the closure of some properties during the last week of December following the government measures. For 2020, the net operating income is up 0.7%. And excluding the COVID impact, net operating income would have been up 3.3%. [Foreign Language] The FFO per unit was $0.383, down from $0.407 in 2019. And the FFO payout was approximately 89% versus 103% last year. So it's an improvement of 14%. [Foreign Language] So the impact of COVID-19 on FFO and AFFO was $0.43 per unit with the principal drivers being $0.006 per unit related to the CECRA program, $0.022 per unit for the additional allowance for expected credit losses and $0.015 per unit for the second quarter bankruptcies related to the 4 tenants. [Foreign Language] The payout ratios have been favorably impacted by the decision to reduce the annual distribution from $0.42 to $0.30 per share -- per unit that became effective as of May 2020 for the distribution. Our total debt to gross book value was 59.4% compared to 59.1% a year ago with a general objective to maintain our ratio below 60%. [Foreign Language] On September 29, BTB announced that it closed a bought-deal public offering of $30 million Series H 7% convertible unsecured subordinated debentures with a maturity in 2025. The net proceeds were used to repay, on October 26, the Series F that was coming to maturity in December and also for other general trust purposes. [Foreign Language] The weighted average interest rate at the end of the year was 3.57% compared to 3.92% for the same quarter last year. So a decrease of 35 basis points. And we continued to benefit from the current low-rate environment with our refinancing. [Foreign Language] Also, it is important to note that in the first quarter last year, the pandemic had no impact on financial results yet other than a negative adjustment in fair value of $6.9 million. The first quarter this year shows minimal COVID impact with no additional exposure to bankruptcies. The account receivables are restored to a pre-pandemic level, and we haven't had to negotiate rent deferrals or abatements. [Foreign Language] On a same-property basis, revenues were up 0.3%. Also excluding the $0.5 million of COVID-19 events, revenue would stand at $24 million for the quarter, representing a 0.6% increase compared to Q1 2020. The net operating income shows a decrease of 2.8%, but excluding the COVID-19 events, the net operating income would be up 1.8%, or for the same property, up 2.8%. [Foreign Language] FFO per unit was $0.089, down $0.011 from the same quarter last year. And AFFO payout was 84% versus 105%, so an improvement of 21% compared to last year. Weighted average interest rate for mortgages 3.56% compared to 3.71%. So also an improvement compared to the same quarter last year of 15 basis points. [Foreign Language] Finally, as mentioned in the second quarter this year, we were successful in raising the new equity in the bought deal. [Foreign Language] As of this morning, we also announced the receipt of a final short form base shelf prospectus from the securities regulatory authorities in each of the provinces and territories of Canada [indiscernible] shelf prospectus. And the final base shelf prospectus is valid for 25 months, during which BTB may offer either trust units, debt securities, subscription receipts or warrants or any combination for a total of $200 million. So this is valid [Foreign Language]. It was filed to provide BTB with financial flexibility and efficient access to Canadian capital markets to pursue strategic initiatives which may include acquisitions. [Foreign Language]

Mathieu, thank you very much. So the next item on the agenda. [Foreign language] The next item on agenda is the election of trustees of BTB Real Estate Investment Trust will remain in function until the next annual meeting. This year, 2 members of the Board of Trustees holding their positions since the inception of BTB are retiring from the Board; Mr. Peter Polatos and Luc Lachapelle. I would like to thank them for their outstanding contribution in the development of BTB since 2006. [Foreign Language] The following candidates are proposed to hold their position of trustees of BTB until the next annual meeting. [Foreign Language] Jean-Pierre Janson; Luc Martin; Fernand Perreault; Lucie Ducharme; Sylvie Lachance; Daniel Fournier; Michel Leonard. [Foreign Language] The votes were tabulated for each individual candidates. [Foreign Language] With respect to Jean-Pierre Janson, the scrutineers have counted 5.5 million votes in favor of the reelection of Mr. Janson. [Foreign Language] With respect to Luc Martin, we have counted 4.4 million votes in favor of his reelection. [Foreign Language] With respect to Fernand Perreault, the scrutineers have counted 5.1 million votes in favor. [Foreign Language] With respect to Ms. Lucie Ducharme, we have counted 4.3 million in favor of reelection. [Foreign Language] With respect to Ms. Sylvie Lachance, we have counted 4.6 million votes both in favor of her reelection, representing 79.5%. [Foreign Language] With respect to Daniel Fournier, the scrutineers have counted 4.6 million votes in favor of his election, representing 80.4%. [Foreign Language] With respect to Michel Leonard, the scrutineers have counted 4.6 million in favor of his reelection, representing 97.5%. [Foreign Language] With respect to myself, the scrutineers have counted 4.5 million vote in favor of my reelection, so representing 95.8%. [Foreign Language] The next item on the agenda is a motion to appoint KPMG as independent auditors of BTB. It is proposed that they hold office until the next Annual General Meeting of the Unitholders and it is also to authorize the trustees to establish their compensation. [Foreign Language] With respect to the appointment of KPMG, we have counted 5.6 million in favor, representing 96.8%. [Foreign Language] The next item on the agenda is a motion to approve the unallocated option under the unit option plan for a period of 3 years as described in the management information circular dated May 11, 2021. [Foreign Language] With respect to the scrutineers report, I have been informed that they have counted 3.0 units voting in favor, representing 52.4%. [Foreign Language] The next item on the agenda is a motion to approve the issuance of unallocated deferred units under the deferred unit plan for a period of 3 years as described in the management information circular dated May 11, 2021. [Foreign Language] With respect to the motion to approve the issuance of unallocated deferred units under the deferred unit plan for a period of 3 years, the scrutineers report 4.0 million votes in favor, representing 69.9%. [Foreign Language] It's now the moment for the unitholders who wish to ask a question or to make some comments to management or to the Board of Trustee to do so. [Foreign Language]

[Operator Instructions] Your first question comes from [ Paul Gernon ] with Burlington Capital Planners.

Yes. I'm [ Paul Gernon ] in Burlington, Ontario. [Foreign Language] My understanding is that you are planning a move of the head office away from rue Crescent. Have you got that new address or maybe it's just being planned?

No. We're not planning to move our office space. We moved 2 years ago to this new space that we occupy. So we used to be at 2155 Crescent Street. And now we're at 1411 Crescent Street on the third floor. So it was a move that did take place 2 years ago. And we had to move from the old place to the new place because of our growth, and we needed more space. So we reported at that time that we had sold 2155 at a very decent profit in order to move into this new property. And it is a property that we own.

Okay. Now this REIT has underperformed against the REIT index for a while. And the total appraised value of the properties has fallen to a degree. There's been some acquisitions, but not many. Now last year, you said at the meeting that you were discussing the possibility of a Toronto acquisition. Is that still in process with nothing yet to announce?

We -- you can understand that with COVID that subsequently hit, we had to withdraw from any acquisition because of the unknown that was basically imposed upon us. And now we're back into the market, and we will purchase properties, because right now, we are actively looking at increasing our size. And we had to do what we had to do in order to dispose of the properties that were nonproducing for us in order to concentrate on better properties. And that's what we're doing. And through the course of this year, we are going to announce acquisitions for sure. We have the firepower in order to do so and the flexibility in order to acquire and grow our portfolio.

I am looking forward to that, to see more growth within the company. [Foreign Language]

[Operator Instructions] At this time, there are no further questions. Please go ahead, Mr. Leonard.

We did receive a question regarding our -- the different segments that we operate in. We operate -- and the question is in English. So I'm going to answer the question in English. So we do own office properties, industrial properties and retail properties. And the question is, are we going to acquire more industrial properties? There are certain properties that we're looking at currently that are in the segment of industrial properties. Given the fact that we are a diversified REIT, we are definitely looking at acquiring more industrial properties to add to our portfolio.

[indiscernible] office or retail.

The -- another question that we did receive is, is BTB going to start acquiring in Western provinces? There are opportunities that are on the market today. And our growth may happen also in Québec and Ontario and Western Canada. So it is something that we're contemplating. We're not -- how can I say this? We're not firm on any deal, but we are looking across the country for our growth. We don't want to be restricted to the provinces of Québec and Ontario. So those are all the questions that we have received and whether verbal or in writing. So again, thank you very much for your confidence in BTB. We have a solid team backing us. We see that the market is also backing us. We can see growth on the horizon, and it is definitely something that we want to grab. So we're back on the acquisition mode. We have almost completed our dispositions. There's only one property left in our portfolio that we would like to dispose of, and it's not a large property, the value of which is a little bit less than $2 million. So nothing drastic or serious on the disposition front. We have the firepower. As Mathieu mentioned earlier, we have money in order to buy properties. So we're definitely looking in order to grow our NOI through acquisitions as well. So thank you very much for participating in our Annual General Meeting today. And thank you, again, for your confidence.

[Foreign Language] So I'd like to say that 2020 hasn't been an easy year with this pandemic, but I want to express our gratitude to management team because they did a tremendous job. And that's the reason why the REIT is possibly in a better shape today than it was 2 years ago. [Foreign Language] Now I express the wish that next time that we have an annual meeting, it won't be a virtual meeting, but it will be somewhere in a hotel or elsewhere in Montréal. [Foreign Language] Thank you for being here today. [Foreign Language]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.