Canadian Net Real Estate Investment Trust ($NETUN)

Good morning, I would like to welcome everyone to Canadian Net REIT's 2026 First Quarter Earnings Conference Call. [Operator Instructions] I would like to advise everyone that 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 the conclusions in these 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 for the year ended December 31, 2025, and management's discussion and analysis for the period ended March 31, 2026, 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 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 Canadian Net's MD&A for the period ending March 31, 2026. 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 Q1 2026 results. Q1 2026 was a steady quarter for Canadian Net. FFO per unit grew 1% quarter-over-quarter and most importantly, we announced a 3% increase in our annual distribution to $0.36 per unit, our 13th distribution increase in our history. It's worth noting that we have increased our distribution every year except for 2024. FFO per unit growth was modest this quarter, primarily reflecting the temporary drag of undeployed capital. In 2025, we repaid our $6 million convertible debenture using refinancing proceeds, then issued a fresh $4 million debenture to fund future acquisitions. As those proceeds are deployed into accretive opportunities, FFO growth will accelerate. The portfolio continued to operate as expected, and our team remains focused on sourcing and analyzing new acquisition opportunities. We are very well positioned today to act on acquisitions that meet our investment criteria, and we will do so with the same discipline that has guided us in the past. One often overlook strength of our model is that we repay approximately $6 million in mortgage principal annually, close to $0.30 per unit, which continuously expands our capacity to grow organically through property refinancing. On the leasing front, 2026 activity has been great. Of the 14 leases scheduled to mature this year, representing $3.47 million in NOI, 13 have already been renewed at an average rental increase of 6.5%, covering 99.9% of expiring NOI. The remaining lease is set to renew automatically during Q4. For 2027, we have 19 leases maturing, representing approximately $2.4 million in NOI, of which 3 have already been renewed at an average increase of 2.2% and representing 19.1% of the expiring NOI. We expect the remainder to be addressed over the coming quarters. Our weighted average lease term stands at 5.6 years with 100% occupancy as of March 31, 2026. Looking ahead, we are focused on deploying the capital currently on hand, potentially complemented by proceeds from property refinancings into accretive acquisitions. The pipeline is active, and our platform now has national reach. We will continue to act with patience and conviction investing when the right opportunity meets our standards. I'll now hand over the call to Ben Gazith, Canadian Net's Chief Financial Officer, for a detailed review of our financial results. Ben?

Thank you, Kevin. We had a solid quarter. For the 3-month period ended March 31, 2026, we generated FFO per unit of $0.166 compared to $0.164 for the same period in 2025, which represents an increase of 1%. FFO for the period ended March 31, 2026, increased to $3.41 million compared to $3.38 million for the same 3-month period last year. FFO was impacted by higher rental income from property acquisitions in January 2025 and lower interest charges on credit facilities. During the same period, NOI was $5.01 million, up 1% from $4.97 million for the same period in 2025. NOI was impacted by increases in rental revenue due to the additions of new properties and increases in rent on certain existing properties. Property rental income was $6.94 million, an increase of 1% compared to $6.85 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 rents. 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 $343.3 million as at March 31, 2026, consistent with the value of adjusted investment properties a year earlier. We continue to maintain a prudent approach with respect to our leverage and our payout ratio, having a debt to gross assets ratio of approximately 54% compared to 55% as of the same time last year. Excluding convertible debentures, debt to gross assets was 53% as at Q1 2026 compared to 54% as of Q1 2025. Our FFO payout ratio for the period ended March 31, 2026, was 53%, an increase from 52% for the same period last year. Our properties are typically financed with fixed rate amortizing mortgages. As of March 31, 2026, the REIT's exposure to variable rate debt is limited to its credit facility and a mortgage on one property. We have $7.7 million of mortgages rolling over in 2026. This includes mortgages -- this excludes mortgages in our JVs, and the rest of our debt ladder remains well structured. The current average term to maturity on our mortgages is 3.3 years. Finally, as Kevin mentioned earlier, we increased our distributions by 3% from $0.35 to $0.36 on an annualized basis, representing the 13th time Canadian Net has increased its distribution since 2012. That summarizes our key results for the quarter. We will now open the line for any questions. Operator?

[Operator Instructions] And our first question comes from Zachary Weisbrod of Canaccord.

You mentioned that undeployed capital is temporarily weighing on FFO. What is the acquisition capacity today?

With capital on hand, like fresh liquidity on the line, probably around $12 million. And then if we add a potential property refinancing, you can probably increase that to $40 million, $45 million.

Okay. So quite a bit of room there. Okay. And for the average rent increase, I believe you mentioned 2.2% for 2027. Can you expand on those leases? I just noticed there was a bit of a moderation from the leasing spreads in 2025 and 2026.

Yes. So for 2025, we're in the 6s. The 2 leases that -- the leases that were renewed yet, so we only have 3. So one of them, basically, we did ahead of time in exchange for -- to stabilize the property for longer term. So this was flat. Then we had the grocery store with a low increase. But when it's all said and done for 2027, I expect the rental spreads to be between 5% and 7% on the overall renewals. So it's going to be in line.

So consistent with 2025 and 2026?

Exactly.

And our next question comes from Tal Woolley of CIBC Capital Markets.

Just on the NOI front, looking from like Q4 to Q1, there was about a $400,000 drop in revenue and about a $200,000 drop in NOI quarter-to-quarter. Just curious if there was anything that would explain that? Like were there any sort of particular accruals in Q4 or something like that, that would have caused the shift?

Yes, a big part, Q4 historically has always been higher because we do have some properties where we get percentage sales. And so we take reserves accruals throughout the year. And in Q4, we get -- we record actually the actual. And so that's why Q4 is always -- tends to always be slightly higher and some management fees as well. So we do the cleanup in Q4 and we take reserves throughout the year.

Okay. So this Q1 NOI rent is sort of like the better track for like the run rate going forward?

Yes.

Okay. And then would you happen to have like the weighted average interest rate on the expiring mortgages for 2026 and '27?

We could get back to you on this. We'll prepare it for the next call. I know 2027 would probably be around top of mind 3%, which is the most important really because that's where the bulk is. But 2026, probably around -- Ben, do you Well, Tal, we will get back to you on it with precise numbers.

Okay. And then just...

We have it. So, yes, [ 3.5% ] 2027 and 4.46% for 2026.

3.5% and 4.5% for '26. Okay. Got it. And where are you seeing borrowing costs right now on new mortgages?

High 4s. It's very volatile. That's the truth. We see that the bond market is plus or minus 20 bps quite often. But right now, it's about 4.9%, 5%, but there's a lot of appetite. So rates are higher, but we get -- the deals we're looking at now, we can get longer amortization. Some other terms can be amended. So overall, it's good.

And is that at like, what, 60% LTV, 75% LTV? What sort of number?

We go between, I would say, 70% to 75% on those deals.

Got it. And -- with respect to finding acquisitions at this point in time, are you seeing a lot of stuff being put up on the market? Or is it -- okay. Can you just talk a little bit about this type of stuff that's coming available?

Yes. We see -- listen, there's many grocery stores on the market. Those tend to be very, very competitive, which is a testament to our portfolio, but we focus now maybe on the larger. So we're looking at some hardware stores. We're looking at some other large national retailers. We are kicking the tires on many different deals. It's always a question of what you find during due diligence. But I would say it's active. It's -- a lot of deals are marketed, a lot aren't also. And so -- but generally speaking, I would say I'm optimistic about the pipeline.

Okay. And is that sort of across the country? Or I know you guys have been interested in expanding your footprint outside of Quebec, but most of the focus is there or outside?

Yes. We -- listen, obviously, in Quebec and Nova Scotia, we tend to have better sourcing just due to our history, but we are looking at stuff out west as well.

Thank you. This concludes the question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.