Canadian Net Real Estate Investment Trust ($NETUN)

Good morning. I would like to welcome everyone to Canadian Net REIT's 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] I would like to advise everyone this conference is being recorded. Before we start, I have been asked by Canadian Net to read the following message regarding forward-looking statements and non-IFRS measures. In talking about financial and operating performance and in responding to questions today, management may make forward-looking statements, including statements concerning Canadian Net's objectives and strategies to achieve them as well as statements with respect to plans, estimates and intentions or concerning anticipated future events, results, circumstances or performance, which are not historical facts. These statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those conclusions in the forward-looking statements. Additional information on the risks that could impact actual results and the expectations and assumptions management applied in making these forward-looking statements can be found in Canadian Net's most recent annual information form from the year ended December 31, 2024, and management discussion and analysis from the period ended December 31, 2025, which are available on their website at www.cnetreit.com and on SEDAR+ at www.sedarplus.com. Management will also refer to non-IFRS financial measures today, which are widely used in the Canadian real estate industry, including FFO, normalized FFO, AFFO and NOI. Management believes these financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of Canadian Net's. The financial Measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similar titled measures reported by other entities. For more information, please refer to the section non-IFRS financial measures of Canadian Net's MD&A for the period ending December 31, 2025. I would now like to turn the conference over to Kevin Henley, Canadian Net REIT's President and CEO. Please go ahead, Mr. Henley.

Thank you, operator, and good morning, everyone. Thank you for joining us today as we walk you through our Q4 2025 results. 2025 has been a great year for Canadian Net REIT and one that reflects the strength of our strategy, the resilience of our portfolio and the discipline with which we continue to allocate capital. It also illustrates the work that we've done in 2024 with our capital recycling and the reinvestments completed in 2024 and 2025. Throughout the year, we delivered consistent growth in funds from operations per unit, positioning 2025 as the strongest year in the REIT's history on this measure. Our normalized FFO per unit increased by 8% quarter-over-quarter and 9% year-over-year. This performance is particularly meaningful given the broader market environment. Over the past several years, we have navigated a period marked by rising interest rates, a constrained capital markets backdrop and heightened volatility across the REIT sector. Despite these challenges, we remain focused on executing a clear, repeatable plan centered on capital recycling, balance sheet strength and necessity-based retail real estate. The balance sheet initiatives undertaken in 2025 have left Canadian Net exceptionally well positioned. The repayment of our $6 million convertible debenture in November funded through operating cash flows and targeted refinancing paved the way for a new $4 million convertible debenture issuance in December. Combined with the ongoing potential to refinance existing properties, this capital activity has brought CNET to its strongest financial footing in recent years. Our portfolio fundamentals remain very strong. We maintained 100% occupancy throughout 2025, underscoring the durability of our necessity-based retail assets and our asset selection. Demand for well-located retail space continues to exceed supply, particularly in the secondary and tertiary markets where we operate. Elevated construction costs and limited available land have created high barriers to entry, reinforcing the long-term value of our portfolio and supporting steady rental growth. Turning to leasing activity. We entered 2025 with 6 leases set to expire, representing approximately $2.42 million in NOI. All 6 were successfully renewed, achieving an average rental spread of 6.9%. Now in 2026, 14 leases are scheduled to mature, representing $3.47 million in NOI. Of these, 11 have already been renewed, covering 97% of the expiring NOI with an average rental increase of 6.1%. Of the 3 leases remaining, 1 remains in negotiation and 2 are set to renew automatically over Q3 and Q4. We are already working on 2027 renewals as well, although we are still early in '26 and expect them to materialize later this year and into 2027. In 2027, we have 19 leases to renew, representing approximately $2.4 million of NOI. One of those has been renewed, representing approximately $90,000. We remain confident in our ability to renew our tenants. Our weighted average lease term stands at 5.9 years with 100% occupancy as of December 31, 2025. Looking ahead, we remain focused on acquisitions and refinancing to support growth. Transaction market conditions have been relatively stable since our last update in November 2025. We continue to assess the pipeline and we'll act quickly when the right opportunity arises. We have capital ready to deploy, and we'll do so with the same discipline that has guided us historically. We're optimistic about '26. I'll now hand over the call to Ben Gazith, Canadian Net's Chief Financial Officer, for a detailed review of our financial results.

Thank you, Kevin. We had a great year. For the 12-month period ended December 31, 2025, we generated normalized FFO per unit of $0.664 compared to $0.611 for the same period in 2024, which represents an increase of 9%. Normalized FFO for the period ended December 31, 2025, increased to $13.7 million compared to $12.6 million for the same 12-month period last year. FFO was impacted by higher rental income from property acquisitions and lower interest charges on credit facilities. Normalized FFO for 2024 was also impacted by property dispositions. During the same period, NOI was $20.2 million, up 7% from $18.9 million for the same period in 2024. NOI was impacted by increases in rental revenue due to the additions of new properties and increases in rents on certain existing properties. Property rental income was $28 million, an increase of 7% compared to $26.1 million for the same period last year and was impacted largely by the same elements as NOI, but was also impacted by increases in recoverable additional rent. For the 12-month period ended December 31, 2025, the trust administrative expenses decreased to $1.1 million compared to $1.3 million for the same period in 2024. The decrease is largely due to a onetime sales tax expense incurred in 2024 of $117,000 relating to previously claimed input tax credits as well as related interest and penalties, which were added back to FFO. Administrative expenses were also impacted last year by higher legal and professional fees. We expect the 3-month Q4 2025 admin expense to be a good run rate for admin expenses in 2026. The IFRS value of our adjusted investment properties, which is the total of our wholly owned investment properties and our proportionate share of investment properties held in joint ventures was $343.5 million as at December 31, 2025, compared to $325 million a year earlier. The increase is primarily due to property acquisitions during the last 12 months as well as fair value adjustments to investment properties. 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 55% compared to 56% at the same time last year, excluding -- sorry, last year. Excluding convertible debentures, debt to gross assets was 53% as at Q4 2025 compared to 54% as of Q4 2024. Our normalized FFO payout ratio for the period ended December 31, 2025, was 52%, a decrease from 56% for the same period last year. Our properties are typically financed with fixed rate amortizing mortgages. As of December 31, 2025, the REIT's exposure to variable rate debt is limited only to its credit facilities. We have $10 million of mortgages rolling over in 2026, excluding mortgages in our JVs, and the rest of our debt ladder remains well structured. Current average term to maturity on our mortgages is 3.5 years. That summarizes our key results for the quarter. We will now open the lines for any questions. Operator?

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

Congrats on a solid quarter and ending off 2025 on a strong footing. My first question is just kind of on the debt side. I mean there's been quite a bit of volatility recently in like GOC rates and the yield curve just kind of based on what's going on in Iran right now. But I'm wondering if you can kind of speak to what you're seeing on rates for debt refinancing.

I would say mid-4s is probably where we are depending on the lenders let's call it, the most aggressive would be 4.25% up to 5%. But generally speaking, the average would be 4.5%.

Okay. Great. And some of the prepared remarks, you guys were mentioning you're still kind of focused on acquisitions. I'm wondering if you can speak to just what you're seeing in the market, if there's been any changes in terms of maybe pricing or geographic areas where you're looking to deploy? And then secondly, would you be willing to sell any assets this year to help fund that growth?

Yes. So first question, let's start with deal flow. So we're encouraged by what we're seeing. There is some deal flow. Our pipeline is active. We have the capital to move. We're ready to move quickly when the right opportunity comes along. That being said, discipline is nonnegotiable. We've historically had 100% occupancy throughout the portfolio, and I think that's a testament to our selection of assets. And although we see potential deals almost on a daily basis, I think it's important to take a step back and realize that with insiders owning 16% of the REIT, we're really in there for the long term. We're aligned with our unitholders. So we have cash, but we're not trying to hit an acquisition for the next quarter. We really want to make sure that we pick the right one. Now when it comes to geography, we're really looking at assets throughout Canada. And what -- could you please remind me the third question?

The third was just on capital recycling and selling assets.

Yes. So it's always a possibility, more on an opportunistic basis now that we have more capital to deploy, but this is always something that we monitor.

Our next question comes from Zach Weisbrod with Canaccord Genuity.

You've been very disciplined in your approach to allocating capital. When it comes to evaluating these acquisition opportunities, what's the most important criteria right now that you're looking for?

Two things. First, I mean, to take a step back in our acquisition process, what's paramount for us first is the market. So do we like where the asset is located? Is it a growing population or stable? Second is -- will always be the piece of real estate. We want to make sure -- as you know, we're buying in secondary and tertiary markets, but we want to buy the AAA real estate in those markets. Third would be the returns. So cash-on-cash return on equity are very important. And as equally important for us is the fact that the asset is dominant in the market. Having 100% occupancy yields to higher FFO year-over-year, including especially the rental increases. And so those are really our criteria. So as of now, we're analyzing multiple opportunities. We're submitting offers. We're looking at what can stick, and we'll move accordingly when an opportunity arise that meets all those criteria.

Understood. And there was a large fair value change on the joint venture properties in Q4. Can you provide us more detail on that?

Difference. So the first thing would be lots of those assets are fast food, right? They are Benny&co., mostly. there's been very good traction in that market. So the fast foods tend to be smaller properties that trade at more aggressive cap rates, those net leases. So that has an impact. We also transferred properties from developed into... Income-producing. So at this point, I think one of the great things in 2025 is we only have one development left. So it's a lot easier to forecast our JVs going forward.

[Operator Instructions] And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. You may now disconnect, and have a wonderful day.