Pro Real Estate Investment Trust (NWH-UN.TO) Earnings Call Transcript & Summary

Good morning, and welcome to PROREIT's Second Quarter Results Conference Call for Fiscal 2025. [Operator Instructions] For your convenience, the results release along with second quarter financial statements and management discussion and analysis are available at proreit.com in the Investor Relations and on SEDAR+. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements and non-IFRS measures. PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated August 13, 2025, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as of August 13, 2025, and except as may be required by law. PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to and not as a substitute for an isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the second quarter earnings release for fiscal 2025 and non-IFRS measures section in the MD&A for the second quarter of fiscal 2025 for additional information. I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT. Please go ahead, sir.

Thank you, Angeline. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary; Zach Aaron, Vice President of Investments and Asset Management, is also joining us for the Q&A period. I will begin with an overview of our second quarter performance before turning the call over to Alison for a more in-depth review of the financial results. We're very pleased with our Q2 performance and the momentum we continue to build. Cash flow growth from positive rental revenue spreads are positively affecting our financial results consistently on a quarterly basis. We're strategically reinvesting capital into opportunities that enhance long-term cash flow and net asset value. We remain firmly on track to become a pure-play light industrial REIT focusing on small and mid-bay properties. In Q2, we delivered notable growth. Net operating income rose 4.5% year-over-year. Same-property NOI increased 8.2%, led by our industrial segment, which posted an impressive 9.6% gain. We're making meaningful progress executing on our capital recycling strategy toward high-quality industrial assets. On June 26, we completed the acquisition of 6 industrial properties in Winnipeg from Parkit Enterprise for $96.5 million. This brings our Winnipeg portfolio to 22 properties, totaling 1.3 million square feet of GLA. As we shared last quarter, this transaction is expected to be accretive to AFFO per unit starting in Q3. This transaction also marks the beginning of a strategic partnership with Parkit, offering future growth opportunities and operational synergies through our platform. We're pleased to welcome Steven Scott, Chairman of Parkit's Board as their initial nominee to PROREIT's Board of Trustees. He's a welcome addition to the Board with his real estate, private capital and public capital market experience. After quarter end, on August 5, we entered into a binding agreement to sell 6 noncore retail properties in Atlantic Canada, totaling approximately 221,000 square feet for $39.8 million. Proceeds will be used to repay $21.5 million of related mortgages with the balance applied to our credit facilities or for general corporate purposes. We expect this sale, which is subject to customary closing conditions, to be completed in Q3. Including this transaction, year-to-date noncore property sales totaled $52.2 million, bringing our pro forma industrial base rent to 88%. This puts us on track to reach 90% -- our 90% target by the end of 2025. Our focus on strong secondary markets remains a key differentiator. According to CBRE's Q2 Canadian Industrial Market report, Halifax, Ottawa and Winnipeg, 3 of our key markets, rank among the top 5 in Canada for rent growth. In Halifax, where we're one of the largest industrial landlords by square footage, average rent growth -- rental rate grew over 20% year-over-year in Q2, the highest increase in the country. We continue to benefit from robust leasing momentum with renewal spreads reflecting both quality of our portfolio and the strength of our markets. To date, we've renewed 63.1% of our 2025 GLA at an average spread of 35.7% and 52.5% of our 2026 GLA at an average rental spread of 33.8%. The 2026 renewal results represent one of the best performances at this early stage in the leasing cycle. Portfolio occupancy was 97.8% at June 30, including committed space, slightly higher than the prior period. In Q3, however, our occupancy rate will be affected by recent vacancy, 176,000 square foot single-tenant property just off the Island of Montreal. As we mentioned on the previous call, this long-term tenant did not renew their lease and the property is now vacant. We are actively exploring leasing opportunities and other options for this asset, including demising it for multi-tenant options. Property has significant upside given its attractive location on the Trans-Canada Highway and the low rate expiring rent. The expiring rent was $4.50 per square foot, while the current market rents are around $9 per square foot. Before I turn the call over to Alison, I want to note that we published our annual sustainability report in July. This is the first year we are disclosing our Scope 1 and Scope 2 greenhouse gas emissions. We've also strengthened our climate-related disclosure by aligning more closely to TCFD recommendations. Full report is available on our website. With that, I'll turn the call over to Alison. Alison, over to you.

Thank you, Gordie, and good morning, everyone. We are very pleased with our second quarter results. Property revenue totaled $25 million, up $0.4 million year-over-year. This is driven by contractual increases in rent and higher rental rates on lease renewals and on new leases. Net operating income, or NOI, was $15.4 million, an increase of 4.5% compared to last year due to these same factors. Same-property NOI reached $14.6 million, up 8.2% year-over-year, benefiting from contractual rent escalations, stronger renewal rates and higher rent on new leases. Funds from operations, or FFO, amounted to $8 million for the quarter, up 8.1%, driven by increases in contractual base rent, higher rates on renewals and higher rental rates on new leases. This was partially offset by an increase in G&A expenses, primarily due to professional fees. Basic AFFO per unit increased by 3.7% year-over-year. Basic AFFO payout ratio was 89.8% in Q2 compared to 93.1% for the same quarter last year and 93.8% in Q1 2025. This improvement reflects the revenue drivers just mentioned, offset by an increase in stabilized leasing costs and G&A expenses. The weighted average capitalization rate for our portfolio was stable year-over-year at approximately 6.7% at June 30, 2025. As expected, following the Parkit transaction, our debt and corresponding ratios rose in the quarter. At quarter end, total debt, including current and noncurrent portions, was $562 million, up $75.8 million from the same time last year. This increase is primarily related to the $63 million non-revolving credit facility used to finance the Parkit acquisition and the debt related to the Montreal acquisition late in 2024. Adjusted debt to gross book value increased to 50.7% from 49.5% at March 31, 2025. Adjusted debt to annualized adjusted EBITDA rose to 9.8% in the quarter compared to 8.8% in the same period last year. Again, this ratio was impacted by the timing of the Parkit acquisition just prior to the close of Q2 2025. We intend to use proceeds from the sale of the Atlantic Canada noncore properties to reduce our leverage and debt-to-EBITDA ratio once the transaction is completed. Looking at the upcoming maturities, we have $33.1 million in mortgage maturities for 2025. We have term sheets signed for $24 million now with the balance being dealt with through asset sales or small mortgage payouts. In 2026, we have $155.8 million in maturities, mainly tied to high-performing industrial assets with upside refinancing potential. For 3 lenders totaling $127 million of the 2026 maturities, we are in active discussions and have already completed some interim upward financing in 2025, supported by increasing property cash flows. The weighted average interest rate on these maturing mortgages is 4.8% for 2025 and 3.8% for 2026. Finally, we maintained our distribution of $0.0375 per unit for the second quarter of 2025. Gordie, back to you for closing comments.

Thank you, Alison. Our strong performance in the first half of 2025 demonstrates that we're successfully executing on our strategy and remain firmly on track to become a pure-play light industrial REIT. We also remain fully committed to working hard towards our medium-term debt ratio target and maintaining a resilient balance sheet. Looking ahead, we're well positioned to pursue value-accretive opportunities and drive sustainable long-term growth to benefit all of our unitholders. Finally, I'd like to thank our team and the Board of Trustees for their continued dedication and support and to our unitholders for their trust. Angeline, we're now happy to take some questions.

[Operator Instructions] Your first question comes from Mark Rothschild with Canaccord.

Maybe just following up on your comments regarding the balance sheet and with the transactions, the retail sales -- the sale of the retail assets rather. How are you thinking about potential dilution from that sale? Or is that really just strengthening the balance sheet from earlier deals? Or is that maybe combined with future acquisitions you have? Just trying to see where you expect to operate over the course of the year and how we should look at the asset sales?

Yes. So I mean, we're $50-plus million for the year. We potentially have another $20 million in asset sales, not firm yet. When we complete that, in our mind, we'll be over 90%, which is our target for industrial base cash flow. And largely for a better thing for the last 3 years, we'd be done in that transition. We may -- we'll look at where we are with our debt and debt to EBITDA at that time. We may have room for an acquisition towards the end of the year. But the bond rates jumped up 25 basis points since we did the Parkit deal. So it could be a differentiation on pricing on assets as we go through the last 6 months of the year. But effectively, we'll be largely done with this "transition,"and then we'll be left with largely grocery-anchored retail and a couple of small office buildings. So that would be de minimis to the entire portfolio. So we may have an acquisition, void of that we'll be paying down debt towards the end of the year.

Okay. Great. Maybe just one more for me. In regards to the 2026 debt maturities, there's quite a bit coming up. Do you plan on just waiting throughout the year and dealing with it as mortgages mature? Is there something specific that you would do because it is a relatively big number. And as you noted, rates have come below?

Yes. I mean, some of that debt is 3%. So you're 4.75% right now of 5% with this little book that we have. I mean the positive thing of this is the longer we wait, the more cash flow that comes into the properties. So the better financing from a leverage standpoint and cash flow that we can get. As Alison alluded to, $127 million of this debt is with 3 lenders, which we've dealt with this year. So they've already actually underwritten the properties for the incremental cash flows coming in. So it would just be a timing thing, I think, for '26. We'll -- some of it comes due in April, some July and some in September. And so yes, we're just going to manage that through as we go. I mean, 3.8% is the average of that debt now. Obviously, it will be a little bit more than that, 4.5% to 5% likely. But in our still in our 5-year cash flow, we have that market debt coming in and still significant cash flow growth over the next '26 and '27.

The next question comes from Brad Sturges with Raymond James.

Just on the -- I guess, the commentary you had around the Montreal vacancy, I guess, based on the activity you're seeing today, how much downtime could we see there at the moment?

Yes. So we had it in our 2026 budget for 6 months downtime. They left July 31. I was on site that week, nice clean building. They left for us. So it just really depends. We had an unsolicited offer for the asset earlier in the year. It didn't go anywhere. We're happy to lease it to a single tenant. But probably the best case would be demising it. There's a natural wall that we could make 2 tenant and probably 3. So we may do some demising that type of thing, that takes time. And it just depends on the market. It's quiet now for larger square footages. But as we come into September, we'll see. Zach, you can maybe comment on some of the people that have been through and whatnot.

Yes, sure. So just as Gordie noted and not much of real surprise for users above 100,000 square feet, it just remains generally quiet overall on new tenant activity at that size range. When you start talking about the users around 50,000 square feet plus/minus, there's still a healthy amount of activity in the market overall and in the South Shore as well. So when we look at the property and we're doing kind of a feasibility study now about demising it into units that kind of approach that 50,000 square foot mark, we start to see a little bit more kicks at the can in terms of tenant interest. Nothing significant or no paper today. But I think when we can start talking about those size ranges to the market and being able to offer that size, I think we'll start to get a little bit more traction there, especially as the kind of summer comes to an end and people are a little bit more in their seat come September.

Okay. If you are going down potentially the path of redemising, like, do you have a budget in mind, what sort of the cost would be for re-leasing?

High level, we've got a $2 million number as a bogey. It just depends on the tenant. That would include 4 to 6 more doors in one of the ends of the building. So that would be the higher end of it, we think, but yet to be determined. If it's a simpler user or a different setup than 3 tenants, it would be less than that. You just have to keep it in the context that we paid $56 a square foot for the building, $10 million. So it'd be worth north of 20 fully leased at market. So we have a little bit of room to play on this asset.

Yes. And just looking at the balance of your lease expiries this year and the early next, anything else that you expect to get back in terms of vacancy materially of note anyways?

Of significance, no, not really as of right now. We are trending quite well on, obviously, our remaining 25 expiries. I think we have about 400,000 square feet left. And this one building of 175,000 makes up a good chunk of that remaining space. We have a few medium-sized spaces in that 25 list remaining, but feel pretty confident about those and looking positive. And looking into '26 as well, where we're over 50% renewed there. On some of the big expiries, we've already started to have some upfront conversations, which kind of look positive. So as of right now, nothing else too major.