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 2022 First Quarter Results Conference Call for which management will discuss the quarter ended March 31, 2022. [Operator Instructions] Should you wish to follow the presentation in greater details, management has made a presentation available on BTB's website at www.btbreit.com-investorrelations-quarterlyandannualmeetingpresentations. [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 give 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 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. 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 your conference, sir.

Thank you very much, Sylvie, and welcome to our conference call for Q1 2022. As you saw, it is a very robust quarter for us. We concluded that during the quarter, the acquisition of 2 Class A office properties located at 979 and 1031 Bank Street in Ottawa. We disposed in January 2022 4 industrial properties located on Boundary Road and Marlo Avenue in Cornwall for total proceeds of $26 million. And I remind you that we had purchased these properties at the purchase price of $15 million. We concluded a bought deal on March -- in March 2022, where we sold more than 9,500,000 units at a price of $4.20 for total proceeds of $40.3 million. We used these proceeds in order to pay down our line of acquisition. We collected 91% of our rents, and this number has been affected by the 13 invoices that were recently invoiced and not yet collected. So it's not related to COVID. Leasing activity, we were extremely active during the quarter, where we leased -- where we renewed leases for 175,000 square feet and concluded leases for 18,000 square feet, totaling -- the total activity is 193,000 square feet. Our occupancy rate stood at 93.1%, a decrease of 0.3% compared to the previous quarter and up by 2.1% compared to the same period last year. As far as the subsequent event is concerned, we concluded on April 5, 2022, the acquisition of an industrial property located at 1100 Algoma Road in Ottawa. So if you look at our operating metrics, we are now the owners of 5.7 million square feet. And that -- the decrease is basically reflecting the corn well disposition, but we are up 400,000 square feet compared to Q1 2021. We concluded leases, as I mentioned, for 193,000 square feet, a 76.4% renewal rate for the quarter. We are -- we own $1.1 million (sic) [ $1.1 billion ] of investment properties, so that's plus $222 million as compared to Q1 2021. Our occupancy rate, as I mentioned, is 93.1%. Our recurring FFO per unit stood at $0.107 for the quarter. Our debt ratio -- our total debt ratio of 60.3%. This is -- we did -- as I mentioned earlier, we repaid the line of acquisition after the end of the quarter, and that represents roughly a 2% decrease. So had it not been for this timing problem, we would have stood at around 58%. Our recurring AFFO payout ratio was at 76.8%. As I mentioned earlier, we had a strong quarter as far as renewed or leased space. We secured long-term lease renewals with service retailers, industrial tenants and governments, such as: NCGS (sic) [ NCSG ] Crane & Heavy Haul in Edmonton, concluded a lease renewal with Loblaws for 34,000 square feet and the Quebec government for 33,000 square feet. We achieved a 13.5% average increase in the renewal rate, noteworthy 7.8% in the industrial segment and off-core office at 19.6% and necessity-based retail at 3.9%. We're finalizing the construction work of a tenant who's arriving in our property left vacant by Ashley Furniture at F.X. Sabourin for 31,000 square feet as this new lease stabilize the occupancy of the building. We're expecting the arrival of another tenant whose lease is conditional upon the city approval for transformation -- construction transformation within the space in question. Also, we are finalizing conditional leases that we concluded in 2021 for a total of 37,000 square feet, one of which includes Giant Tiger for an occupancy of our Gatineau property. Again, this is a conditional -- we're waiting for the approval of the city regarding the occupancy of Giant Tiger within this property. If we look at our real estate portfolio, our land down property, which is the one that we acquired in January in Ottawa located on Bank Street, we had great leasing velocity. We are -- were almost concluded 2 leasing transaction for office space and one additional potential new tenant where this property is going to be almost fully leased by the end of this quarter. Our investment activity has been focused on industrial and off-core office assets with strong fundamentals, good pipeline for value creation and maximization of the retail portfolio. Regarding our lease renewals, our occupancy rate in the industrial segment was 99%, off-core office at 89.3% and necessity-based retail at 95%. Regarding the diversification, we have opportunities for additional geographic diversification, especially in the industrial segment where we're very active. If we look at our asset diversification, we have 26% of our properties that are in the industrial segment, 24% in the necessity-based retail and 50% in the off-core office properties. Year-to-year occupancy of 2.1% in -- sorry, I made a note and I can't read my note. So plus 3.4% in the industrial segment, in the necessity-based retail at 5.8% and in the off-core office at minus 1%. By geographic sector, our year-to-year occupancy increased by 2.1%; in Montreal -- on a complete basis; in Montreal by 2.8%; in Quebec City, it reduced by 0.6% and Ottawa an increase by 0.8%. Obviously, in and Saskatoon 100% because these were not part of our portfolio in the past. With this summary, that concludes my summary, and I'd like Mathieu to take over and guide you through our financial highlights.

Thank you, Michel. Good morning, everyone. So we're pleased with the results. The accretive effect as well, the recent acquisitions with the occupancy rate, as Michel mentioned, up 210 basis points versus a year ago and showing increases across the 3 operating segments. The composition of the portfolio also evolved with now more than 23% of revenues coming from the industrial segment, with an increase of 5%, with a decrease of the necessity-based retail revenues from 27% to now 23%. So on a consolidated basis, revenues are up 23.5% and $29 million. NOI is also up $30.8 million -- at 30.8%, sorry, at $16.2 million, and the NOI margin was up 3.1%, close to 56%. So it's following the sale of the Cornwall portfolio that had a margin of 49%, and we replace it by the recent acquisition at a margin of 70%. So year-over-year, the industrial segment NOI has doubled, and if we look overall for the same-property NOI, we see an increase of 2%, and it's due to the combination of important leasing efforts, resulting in an increase in occupancy rate, and also the average lease renewal rate that was positive across the 3 operating segments. For this quarter, it's plus 13.5%, and let's remember as well, 2021 for the entire year was an increase of 5.5%. The recurring FFO was $0.107 per unit for the quarter compared to $0.089 per unit for the same period in 2021. So it's an increase of more than 20% with a large contribution, again coming from the accretive acquisition and as well the good performance across all the operating segments. Just for the denominator, looking at the number of units. So the weighted average number of units increased from 74.4 million in Q4 2021 to 78 million in Q1 2022. So that's what the equity issuance that we did on March 30 with the overallotment. So we were able to sell an aggregate of 9.6 million units at a price of $4.20 for total proceeds of $40.3 million. And then just thinking about the units as well, we also have 319,000 units converted from the Series H debenture during the quarter. Cumulative recurring AFFO payout at 76.8%, so it's down 10.6% compared to the same period last year. Looking at the capital structure, weighted average interest rate for mortgages at 3.56%, a slight decrease of 2 basis points compared to last year. And the trust concluded the quarter with a debt ratio, as Michel mentioned, of 60.3%. So it's a slight improvement compared to previous quarter, but following the equity raise and the repayment of the credit facility of $31 million. So we have an estimate around $58.6 million post closing. And finally, just for the refinancing commitments for this year. We have completed $25 million out of $74 million. So with the rising interest rates, we don't see much exposure with the loans that are coming due this year. And as well for next year, we only have $35 million that is coming due. So it's not a big amount for us. So the interest rates to be refinanced and that's materially far from the current interest rates that are available in the market. Cash, we have the $41 million of cash available at the end of the quarter, $47.7 million of total availability between 2 credit lines. And as we said, we reimbursed the $31 million on April 5 to bring up our capacity with the credit line and to bring down the cash by $31 million. So this completes our presentation, and we'll move to the Q&A.

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

Just wanted to quickly touch on the renewal spreads because they were quite strong, particularly in office. Can you give us a sense as to whether that is indicative in your view of the trend in office, or was it property specific? And then -- and maybe if you can touch on what you're seeing in retail and industrial as well.

I think that to answer your question, it was -- it's not necessarily property specific. I think it's tenant specific. In this case, it was -- the needle moved as a result of a lease renewal with the government of Quebec. The government of Quebec was not paying market rates. And as a result of a negotiation that we did conduct, we brought it closer to market rates. So hence the increase. Sometimes we are affected by the reverse trend. I remember a year or so ago, where we had renewed a lease for 30-some thousand square feet with Desjardin at a lesser rate. And we carried the fact that in the office segment, we were minus something, I forget what percentage it was, but we carried it for a while as a result of a lease negotiation that was at a lesser rate. And then in this case, well, I think the pendulum goes the other way where effectively, we were successful in getting close to a market rate with this tenant. We have other government tenants within the same area where we -- that lease is coming up for renewal next year. So we are going to enter into negotiations for the lease renewal. And we anticipate that in that lease, again, we're going to see a substantial increase as a result of the fact that they're paying currently below market. So generally, in the office segment, we are able to increase rents. We are leasing our space to new tenants. I talked about the land down property in Ottawa on Bank Street, where we're extremely successful in leasing spaces that are going to become available. And also in our portfolio, generally, we see that there's demand for office space. I wouldn't call it a very strong demand. I don't think that that's the qualification that I want to leave you with, but there is demand, and it's not soft. So it's not business as usual, but it's getting a lot better, and it's new demand for vacant spaces. And we see it in Quebec City as well, which is Quebec City was fairly quiet for a while and all of a sudden, we see that there's a lot of demand. There's a lot of activity regarding our lease renewals. So we tend to be positive on the office segment as well.

And are you finding generally that the government is kind of maintaining their footprint, they're not increasing or decreasing. They're just kind of signing on to the same amount of space as they were prior to COVID or I guess, on renewal?

I think that generally, the answer is yes. In this specific case, it is 30-some thousand square feet. Obviously, government employees and the like, and they're extremely -- their footprint -- the individual's footprint within these premises is extremely tight. So even if the government would want to lessen the number of people, I think that they would still need the same 30,000 square feet because there's so many people in that space. It's so crowded that if they would let go 10% of their people or ask 10% of their people or 20% of their people to work from home, I think that they would still need the 30,000 square feet.

Okay. Fair enough. And then, I guess, on industrial, I mean it was a positive spread. It was reasonably good, but that market has seen exceptional rent growth according to some third-party brokers. So was it, again, tenant or lease specific this quarter? And are you seeing that trajectory in terms of brand growth within your portfolio as well?

We don't -- for this year, we don't have a lot of lease renewals in that sector. So I can't really answer that question because most of our leases -- industrial leases are coming up for renewal next year or the year after and so on. So there's no impact this year.

And is your approach to hold off, I guess, until as close as possible to the leasing date because market rents are moving at the pace that they are. I mean it sounds like -- I mean, there's one...

I know what you're talking about, and that's not really our lease strategy with our tenants. If you wait until the last minute in order to wake them up and all of a sudden they have to conclude the renewal that's a strategy, but it's not -- we try to speak to our tenants, good times, bad times, 12 months prior to their lease expiration. Yes, there's going to be an increase, but we don't wait until the last minute. You saw from our numbers that we try to stabilize our portfolio by concluding our lease negotiations at least a year prior. So -- and we're on track within our strategy. So maybe we could lose a buck or 2, but there's also something that's important and it is to respect our tenants and create a long-term relationship with them because this increase in the industrial segment eventually may lead to a decrease in the industrial segment. And you want to make sure that your tenants have been fully satisfied with the approach on lease renewals as well. So as you know, Matt, real estate is a long game. And we went through COVID and there are some tenants that didn't respect the relationship that we may have had with them, and we didn't forget about that. So when it's going to be time for these tenants to renew, we will remember what happened during COVID. So it's the same thing goes -- it goes both ways. So I think that within the relationship that you're trying to create, the long-term relationship that you try to create, I think it is really important to conclude fair negotiations with our clients.

Fair enough. That makes sense. On the balance sheet side and maybe give it into the acquisition side, it sounds like you're fairly insulated from an interest rate standpoint this year given the maturity profile. But can you speak to changes, if anything, in underwriting of acquisitions? Are cap rates starting to move a little bit higher to account for this move in the bond yields? Or are you still seeing the same level of demand at similar cap rates at this point in the market?

Well, if we price the increase in interest rates within our accretion environment, we definitely have to conclude transactions at higher cap rates than what we have done in the past. So the message out there that we're trying to send is the fact that it's not business as usual when it comes time to make acquisitions. And we are going to acquire accretively, and as a result of that, we have to move up in our cap rates. As far as interest rates are concerned, your view is as good as my view, but I don't think that this is going to be an event that's going to last for 5 years. So as far as our strategy there is that we may go 2 years, we may go 3 years, but we may not conclude on a 5-year basis if the rate curve doesn't flatten, and we're expecting the curve to flatten. As a result of competition and so on, I don't think that the banks are going to continue -- or the lenders, I should say, are going to continue to fully price what's going on in the market. And as a result of this, I think that we're going to see a flattening of the curve as we've seen before, and it's not the first time that in the 15 years of BTB that the interest rates have risen. So overall, we're going to adapt our strategy, and we're not going long in our financings as a result of what's going on in the markets right now.

Makes sense. Yes, it seems -- this appears to be similar to 2013 and 2018. But on the - what was I going to say. On the disposition front, last question for me, those weren't necessarily cap rate trades. It was kind of land value and density. So is that market still kind of there in terms of what buyers were willing to pay for that excess density?

Overall, I think the buyers are still there. Like we're still there as buyers. I think that the lala kind of environment of real estate is going to come to an end, and I think it's good. I think it's good for the market. And that's going to cause the construction industry to slow down, and we're going to go back to normal pricing as far as construction is concerned. Construction is so expensive that when a tenant tries to renovate their premises, it's so expensive that they don't or that in lease renewal, they're asking us to basically show them other spaces within the same property to see if they can accommodate their need in another space. So the construction cost that used to be, I don't know, $35, $50 a square foot in order to improve an office space is now $100, $120 a square foot. So it's completely crazy, and it's difficult to conclude leasing transactions if a tenant wants to renovate its space because we're not going to hold the ball. So it's for them to pay for the full fare of what it costs to renovate the premises. So overall, it's an impediment in order to do business. And I think that the slowdown is going to cause the construction industry to itself slow down, and I think it's a good thing for the market.

Okay. And sorry, Michel, that was my fault on the question, but I was actually asking about your disposition possibilities within the retail portfolio and whether or not the ability to sell the density or the partners that you're working on building out the density, has that changed at all in terms of their appetite to go after your assets?

No, not at all.

Next question will be from Chris Koutsikaloudis at Canaccord.

Just maybe following up on the line of questioning on the acquisition front. Are you seeing maybe a slower pace of transaction activity in the market now? And does the impact of higher rates change the types of properties you're looking to acquire? I know you mentioned the need to acquire at higher cap rates, but does the nature of the assets and the asset classes change as well?

That's a difficult question to answer. Chris, as you know, we're focused in the industrial segment, and we are concentrating on acquiring it in the industrial segment. We've seen that what was asked by vendors -- right now, in certain circumstances, we're able to -- and I don't want to use the word retrade because it's a dirty word, but I think that there's a reality check that has to -- for everybody, whether a seller or buyer, has to basically [ lean ] on in the sense that you have to realize that people are purchasing properties in order to make money. And if you can't make money when you acquire a property, then there's no purpose in acquiring a property. So -- and that's why our [indiscernible] and we're harping on this is the fact that we have to be accretive when we purchase. And so overall, we've seen buyer -- sellers that are understanding what's going on in the market and are adjusting their cap rates upwards. Not necessarily a huge adjustment, but an adjustment that is necessary in order for us to be able to conclude the transaction. So, I think that there's an understanding. I think that people are not crazy about whatever they're asking as far as a consideration for the sale. But I think that there's an adjustment out there that's taking place right now. It's very quiet, but there is an adjustment that's taking place.

And at this time, there are no further questions. Mr. Leonard, please continue.

Thank you very much for joining us today. The -- I think that our quarter has been extremely strong. We've shown that patience in real estate is really rewarded by being patient. And I know that regarding -- when we started in 2018 to dispose, it did create a lot of pressure on BTB as far as its ratios were concerned, as far as the overall performance was concerned. But now we're seeing that after the acquisitions that we concluded last year, which was a strong pipeline of $222 million, the dispositions that we were able to conclude at a profit, and the overall portfolio performance that is demonstrated in this first quarter. I think that it's a great testimony to the work that took place by all employees involved of BTB. And it was strenuous as far as the work that had to be done in order to get to where we are. We don't want to lose our place. We don't want to lose our position, our current position and we want to build on this. And that's why we've been saying that overall, year after year, we want to double the portfolio, but do it in a way that is going to bring results for our unitholders. As I mentioned, interest rates are currently a factor, and we're considering this factor in all our decisions. We still have a pipeline that is very interesting as far as our acquisitions are concerned. We have certain properties that we've decided to dispose, and we're putting them on the market. But again, not a fire sale. And if we don't sell them, then we're just going to keep them for a while and put them back on the market when the time is going to be proficient for it -- for them to be sold. So overall, great results, very proud of our performance, very proud of our team. Everybody has been rowing in the same direction, and that has concluded a fantastic quarter for us. All I've got left to say is to thank you for your trust. Thank you for following us, and thank you again for seeing BTB to a better position. Thank you again, and we'll see you in the next quarter.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.