Canadian Net Real Estate Investment Trust (NETUN) Earnings Call Transcript & Summary

Good morning. I would like to welcome everyone to Canadian Net REIT's 2024 First Quarter Earnings Conference Call. [Operator Instructions] I would like to advise everyone that this conference is being recorded. I would now like to turn the conference over to Ben Gazith, Canadian Net REIT's Chief Financial Officer. Please go ahead, Mr. Gazith.

Thank you, operator. Good morning, everyone, and thank you for joining us on our Q1 2024 results conference call. Before we begin today, we are obliged to advise you that in talking about our financial and operating performance and in responding to questions today, we may make forward-looking statements, including statements concerning Canadian Net's objectives and strategies to achieve them as well as statements with respect to our plans, estimates and intentions or concerning anticipated future events, results, circumstances, or performance, which are not historical facts. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the risks that could impact our actual results and the expectations and assumptions we applied in making these forward-looking statements can be found in Canadian Net's most recent annual information form for the year ended December 31, 2023, and management's discussion and analysis for the period ended March 31, 2024, which are available on our website at www.cnetreit.com and on SEDAR+ at www.sedarplus.com. We will also refer to non-IFRS financial measures today, which are widely used in the Canadian real estate industry, including FFO, AFFO and NOI. Canadian Net believes these financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of Canadian Net. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similarly titled measures reported by other entities. For more information, please refer to the section non-IFRS financial measures of our MD&A for the period ending March 31, 2024. I will now turn the call over to Kevin Henley, Canadian Net REIT's President and CEO. Kevin?

Thank you, Ben, and good morning, everyone. Our portfolio continued to perform very well during Q1. We maintained our 100% occupancy and 57% payout ratio. In addition, we are happy to announce the completion of our Lachenaie Benny&Co. development, which came live in May. We are also starting the construction on our Beloeil Benny&Co. development, which will come live in the fall. Combined, those properties will add approximately $135,000 of NOI on an annual basis to the REIT. While the portfolio performed well, we reported a 3% decrease in FFO per unit from $0.157 to $0.152 per unit. This was due to higher interest expense on our line of credit and most importantly, from mortgages renewed in 2023 in the wholly owned and in the JVs. As we move into 2024, we are seeing lower mortgage rates than 2023, so we believe the hype is behind us at this point. Turning over to lease renewals. We only have one lease coming up for renewal at the end of 2024, representing approximately $60,000. Looking at 2025, we have 5 leases coming up for renewal, representing approximately $2.35 million in NOI. Of those, one lease of $90,000 has already been renewed at a 32% spread. We expect the leasing spread on the 2025 renewals to be at around 7%. Demand remains excessively strong in our asset class. The properties on which we have expiring leases hold strong positions in their markets and rents are below market. As we move into the year, more of the 2025 leases will be renewed. Our weighted average lease term is at 6.5 years. On the financing front, we have 8 loans for renewal in 2024. Those include two variable rate mortgages on the properties held for sale and three mortgages and joint ventures. Those are spread throughout the year and excluding those on the properties held for sale, we have one in each of Q1, Q2, Q3 and 3 in the Q4. The loan renewal in Q1 allowed us to generate $150,000 in cash proceeds, which we will get during Q2. As we look at the transaction market, we are hopeful that activity will pick up as we saw a decrease in the all-in mortgage rates compared to 2023. Valuations held strong last year, which made it impossible to buy accretive opportunities. With lower rates in 2024, we might see a pickup in activity. Our current objective remains to recycle capital in order to high-grade the portfolio and invest in accretive opportunities as those arise. I will now turn the call back over to Ben Gazith, who will review our Q1 results in more details. Thank you.

Thank you, Kevin. . For the 3-month period ended March 31, 2024, we generated FFO per unit of $0.152, down 3% compared to $0.157 for the same period in 2023. FFO for the period ended March 31, 2024, decreased to $3.1 million compared to $3.2 million in Q1 2023. FFO was impacted by increases from contractual rent step-ups, which was offset by higher interest charges on mortgage renewals, variable rate mortgages and credit facilities. During the same period, property rental income was $6.5 million, an increase of 2% compared to $6.4 million in the same period last year. NOI was $4.8 million, down 1% from $4.9 million for the same period in 2023. Rental income and NOI were impacted by increases in base rent and recover additional rents of certain existing properties and decreases in rental revenue from property dispositions in 2023. The IFRS value of our adjusted investment properties, which is the total of our wholly owned investment properties and our proportionate share of the investment properties held in joint ventures was $330 million as of March 31, 2024, compared to $329 million a year earlier. We continue to maintain a prudent approach with respect to our leverage and our payout ratio, having a debt-to-gross asset ratio of approximately 57% at year-end compared to 59% at the same time last year. Excluding convertible debentures, debt-to-gross assets was 54% compared to 55% last year. Our FFO payout ratio for Q1 2024 was 57%, a slight increase from 55% for the same period last year. Our properties are typically financed with fixed rate amortizing mortgages. As of March 31, 2024, the REIT's exposure to variable rate debt is composed of 2 variable rate mortgages and its credit facilities. In addition, bridge loans on our development project are at variable rate until converted to takeout financing. We had $12 million of mortgages rolling over in 2024, excluding [indiscernible] in our JVs and the bulk of our renewals are not before [ 2020 ]. Included in the mortgages rolling over are $20 million of mortgages associated with properties held for sale. The current average term to maturity on our mortgages is 4.3 years. That summarizes our Q results for the quarter. We will now open the line for any questions. Operator?

[Operator Instructions] And our first question comes from Alexander Leon with Desjardins Capital Markets.

My first question is on some of the commentary you made on the cadence of the lease renewals. So I just wanted to confirm, so for 2024, you mentioned that there's only 1 lease coming up for renewal and that is at the end of the year. Is that correct?

Exactly. So it's a December lease. So we'll be renegotiating with the tenants shortly.

Okay. Awesome. And then maybe can you provide some commentary on maybe the cadence of some of those leases? I think you mentioned 5 leases that are coming up for renewal in 2025.

Yes. So I would say they are spread really throughout the year. We have 2 in Q1, 1 in Q3 and 1 in Q4. Those are the major ones. The other one has been renewed already. And so as for the cadence, those are national tenants. And so the way though they address renewals is rarely ahead of time. They have procedures to follow. So while we feel extremely confident about the renewal, we won't have an answer before their actual option period delay.

Okay. And on that...

6 to 9 months ahead of expiry.

Okay. And then the 1 renewal that you mentioned, you completed the 32% spread. Did you mention that was 90,000 square feet?

$90,000 sorry.

$90,000. Okay.

That increased by 32%.

Okay. Awesome. And then maybe just the last one. I want to confirm some of the commentary you mentioned on the mortgages. You mentioned one in each of Q1, Q2, Q3 and then 3 in Q4. So that concludes the mortgages in the JVs?

Exactly.

Okay. And -- so I guess on the 2 variable rate mortgages, are those the ones that are on balance sheet?

Exactly. So the 2 properties you see for sale, those are variable rate mortgages.

Those are the ones listed for sale. Okay. That's it for me.

Our next question comes from David Chrystal with Echelon.

Noticed a slight fair value gain on the assets held for sale. Is this based on ongoing discussions on the sale process and kind of refining pricing there? Or is it more just broadly cap rates or higher NOI forecast for those properties?

This is simply from NOI. So we renegotiated some leases last year on those properties, extending the term, increasing the rent. And so that's what you see reflected. Cap rate remained stable. And so that's the reason.

And are you having any active discussions? And can you maybe comment on expected timing of those dispositions?

Having conversation, yes. Timing of dispositions. wouldn't want to commit at this point.