Pro Real Estate Investment Trust (PRVUN) Earnings Call Transcript & Summary

Good morning, and welcome to PROREIT Fiscal 2022 and Fourth Quarter Results Conference Call. [Operator Instructions] For convenience, the press release along with the fiscal and fourth quarter financial statements and management's discussion and analysis are available at proreit.com in the Investors section and on SEDAR. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements on IFRS measures. PROREIT's remarks today may contain forward-looking statements with its current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements or other future events or developments. Forward-looking statements are based on information currently available to management on estimates and assumptions based on factors that management believes are appropriate and reasonable in these circumstances. However, there can be no assurance that such estimates and [indiscernible] prove to be correct. Many factors could cause actual results, level of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by 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 ]. Additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated March 22, 2023, available at www.sedar.com. Forward-looking statements represent management's expectations as of March 22, 2023. Except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statement 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 suit -- substitute for or in isolation from, the [ PROREIT's ] IFRS results. Description on these non-IFRS financial measures, please see the 2022 fiscal and fourth quarter earnings results and MD&A. Reconciliation of non-IFRS to IFRS results [indiscernible] as applicable, may be found in the earnings release and MD&A for the 2022 fiscal year and fourth quarter. Please refer to the non-IFRS measures section in the MD&A for the fiscal and fourth quarter for additional information. I will now turn the call over to Mr. James Beckerleg, President and Chief Executive Officer.

Thank you very much, Michelle, and good morning, everybody. Welcome to this call. Joining me from the management presentation today is Gordie Lawlor in his capacity as Executive Vice President and Chief Financial Officer; and Alison Schafer, our Senior Vice President of Finance. Just before I get into our year-end numbers, I'll [ load ] for everybody that this March, PROREIT is celebrating its 10th anniversary. And that's [ a accomplishment I'd say ] -- it's a period that we're very proud of, and we will be taking [indiscernible] to congratulate ourselves. This call also represents my last analyst call because as most of you know, I'll be stepping down from the CEO position to take a nonexecutive role on the Board of Trustees as of April 1st. So after a very successful transition year, which we'll speak to, Gordie will take the helm of [Audio Gap] compared to the same period of last year. At December 31, 2022, the weighted average in-place rent on our industrial portfolio was $7.78 per square foot, an increase of 5.3% compared to the same date last year. Our retail sector, mainly comprised of necessity-based property continued to perform well with a 2.7% increase in same property NOI for the year. Our office segment, which now comprises just 13.3% of our total [indiscernible] property NOI for the year, reported a decrease in occupancy in 2 of our 8 buildings. On the leasing front, we continue to be very successful in our renewal activities. We renewed 93.2% of our leases maturing in 2022 at a positive average spread of 16.4%, as well very positive 49.8% of leases maturing in 2023 have been renewed at an average spread of 36.7%. Our successful leasing spreads have not yet fully impacted our financial results. But as I mentioned earlier, we will see the benefits over the coming quarters. Rental rates are continuing their upward trend in the robust Halifax, Southwestern Ontario and Ottawa markets where we have a strong presence. In the year, we also updated independent external appraisals for 44 properties contributing to the fair market value gain over the year of $52.5 million. Let me now briefly go over some financial metrics for 2022. Our solid growth across key indicators was mainly driven by the net acquisition activity in the last 12 months. We ended the quarter with 130 properties in our portfolio, including a 50% ownership interest, the 22 properties, compared to 120 properties owned at 100% at the same time last year. As such, at the end of 2022, we owned approximately 6.5 million square feet, but in total managed approximately 8 million square feet. Total assets amounted to $1.04 billion at the end of the year, up 4.6% year-over-year. Property revenues grew $97.2 million, a 25.2% increase compared to 2021. Net operating income reached $57.7 million, up 24.8% year-over-year. FFO grew to $31.3 million, up 24.8% year-over-year. Our basic asset full payout ratio is 86.9% compared to 87.7% a year ago. At $8.21 per unit at December 31, 2022, I'm pleased to highlight that our NAV per unit continued the upward trend, increasing $0.94 per unit since 2021 and $1.90 per unit since 2020. We also strengthened our balance sheet during the year, reducing our gross debt by $10 million. As Jim mentioned, we also reduced our debt-to-gross book value ratio to 49.7% at year-end compared to 53.1% at the end of 2021, a trend we intend to continue to pursue over the coming years. This year, the joint venture with Crestpoint, the sale of our noncore properties and our successful leasing spreads were the greatest contributors to debt reduction. Our debt maturities are quite modest with $52 million of mortgages coming due in 2023 at only $26 million coming due in 2024, allowing us to be disciplined in managing our balance sheet. In 2022, we published our inaugural ESG report, and our Sustainability Steering Community has been working diligently to prepare the follow-up. We continue on our ESG journey and an increase in tracking efforts to better understand where and how we can improve our efforts to reduce our carbon footprint and strengthen our social impact. We are excited to be able to report on our progress this spring. I'll now turn the call over to Alison to discuss Q4 financial results.

Thank you, Gordie. We recorded a solid financial performance in the fourth quarter. Property revenue amounted to $25.1 million, a 9.3% increase compared to the same period in 2021. The net operating income was $14.6 million, up 9.1% year-over-year. These increases were mainly driven by the impact of the net acquisition activity over the last 12-month period. AFFO totaled $7.7 million, a 4.5% increase compared to Q4 last year. The growth was largely related to the net increase in the number of properties acquired in fiscal 2022, combined with the increase in property management fees resulting from our joint venture transaction as sole property manager of the entire 50% owned portfolio. I am pleased to highlight our FFO and AFFO unit performance in the quarter coming in slightly above 2021. We achieved this while also reducing our debt-to-gross book value by 3.3%. Our basic AFFO payout ratio stood at 88.5%, an improvement compared to 91.5% from the prior year period. Our overall same-property portfolio represented 92 properties out of our 130 property portfolio. Industrial same-property NOI was up a robust 5.0% in Q4. However, our overall same-property NOI remained relatively flat in the quarter as a result of increased vacancy in 2 out of our 8 office properties. Our liquidity position remained healthy with $23 million available under our credit facility at the end of the year. Our weighted average cap rate for the portfolio was approximately 5.8% at the end of the year, or $155.89 per square foot, down from 5.9% at the end of 2021. We saw some cap rate expansion in a few areas of our office portfolio. For almost all of our discounted cash flow models, we have increased discount and terminal rates to reflect the interest rate risk in the market. In general, valuations are holding due to increased cash flows in our model. Finally, distributions of $3.75 per unit were incurred monthly throughout the fourth quarter of 2022. I will now turn the call back to Gordie for closing remarks.

Thanks, Alison. In the context of the heightened macroeconomic uncertainty, market volatility and high interest rates, we believe we are well positioned and view this as a time of opportunity to focus on operational efficiency. We have lower leverage to perform sustainably. Optimizing our portfolio by increasing our concentration on high-performing assets in the industrial sector, while disposing of smaller and nonstrategic properties and reducing debt, remains our primary focus. Increasing our industrial cash flow as a percentage of the total portfolio is key as we settled our next target to reach 80% in the near term from our current 69% at year-end. This strategy has proven successful as evidenced by our strong results, and we are confident it will continue to generate stable cash flow as we progress towards our goal of $2 billion in assets in the near term. We remain steadfast on our commitment to create sustainable value for all stakeholders. I would like to conclude by thanking our longtime partner and friend, Jim. It has been privilege and an honor working side by side with him over the past decade and to build [ pro-region ] and what it is today. I look forward to benefiting from your contributed guidance and experience -- expertise as a member of the Board. Thank you, Jim.

Are we ready for questions.

We are.

[Operator Instructions] Your first question comes from Fred Blondeau of Laurentian Bank.

Gordon, just on the $65 million of debt maturities are, I guess, if I understood well, I guess, around $55 million, $56 million remaining this year. I was wondering, what's the timing of those? And how are the discussions progressing so far?

We have about $17 million coming due in June. We've already got a term sheet signed on that with some good margin terms. And the final rate obviously, depends on when we get the committed financing and fixed rate, but that one performed well. That was part of our Winnipeg Industrial. We got a couple of small million dollar assets during the year. And the next piece is about $30 million maturing at the end of December. So we haven't really worked on that yet.

Okay. And can you give us -- is it too early to give us a bit of indication on rates that you're seeing today?

Yes, it's probably too early. We have an attractive spread to -- depending on the term, we have options between 3 and 10 years, and that's sort of the margins on that, based on volume be between 200 and 215. But as you know, the basis point spread on the curve is [indiscernible] 50 to 60 basis points weekly. So I can't really comment on an all-in price right now.

No, that's fair. And then in the press release, you mentioned capital recycling. I was wondering if you could possibly quantify expected dispositions for this year and I guess, the expected net impact on the debt ratio?

Yes. So I mean, we've got both, give or take, the same as last year, $30 million circle in some assets that we would sell if the pricing was right and the market was there. Can't really comment on that right now as to what -- where the debt level would be [ with repayment ].

Okay. But do you guys like -- yes, do you have a [ debt-to ratio par ], I guess for 2023?

Since we have a 3-year target to move below 50%, but we haven't quantified it on an annual basis of anything like that.

The next question comes from Brad Sturges of Raymond James.

Just on the asset built there, the $30 million that you've circled, is that predominantly retail assets?

Retail, potentially some office, but these are just assets that we circled at this time.

Okay. Nothing is on the market right now?

On the markets, a difficult discussion. There's assets -- we get calls all the time about certain of our assets. So it just depends on the [ call ] and what's going on in the market. So -- but nothing -- you won't see any flyers or anything as such. I don't think in your inbox [indiscernible].

Fair enough. Just on the leasing side of things. Obviously, you've made good progress on your '23 expiries. Just in terms of what's left to do or what's remaining, what would you be expecting for your leasing spreads, given it's -- I think it's mainly industrial leases that are rolling this year?

Yes. I mean there's a couple of chunky ones and then a bunch of small assets, which we know is on the -- with Crestpoint. So what we've been seeing as you see in the numbers here, 30% to 40% leasing spreads in those numbers. So I think we'd expect that margins to continue.

Okay. And a similar type of [ retention rate ] then, I guess, with your tenants. So I think you were 90% last year. Is that kind of what you're expecting for 2023?

Yes. I mean that's our target. I think for the past 6 or 7 years, we've achieved in excess of 90% of leasing and re-leasing And so I wouldn't expect to end that much different this year.

Increase in vacancy in the industrial sector.

Yes, we don't see any increase in vacancy during the year or anything like that, where we are right now. Nothing significant.

But no -- nothing abnormal [ versus like ] transitional vacancy that a larger lease might have some downtime?

We have 100,000 square foot building in Montreal in the -- close by the airport. And that will -- [ committed ] vacancy will stay the same, but we'll have about 6 months downtime where three tenants need to replace with new tenants on a 10-year lease and rents going from $10 to $15.50, $15.75 over -- so basically, Q2 and Q3, that property will be down on an NOI basis, but then we'll be fully leased and back up September.

The next question comes from Mark Rothschild of Canaccord Genuity.

Let me just start, congratulate Jim and Gordie on all of this. It's been a pleasure. Look forward to seeing you -- working with you guys and following the company. As far as the asset sales, you sort of touched on this already, done some good leasing on the office side. Do you see potential for much more this year? And does that play into your thoughts on timing of potentially selling some of those assets as you increase your focus on industrial?

So it's Gordie. So the challenge for all the markets is really is the debt. So we have office access that we're asked about all the time. We have solid retail assets with long-term tenancies [indiscernible] to what hasn't been a focus for a while. Those are the assets that we can circle but the actual potential for sale is really driven by the debt market. And we now have -- the bond rates jumped 50 to 70 basis points in a 2- or 3-week period when it takes 2 to 3 months with somebody to negotiate diligence and then close on the property, that's really what prospects in the market right now. It's not really the best for real estate, especially this well performing. So that's really the driver of whether asset sales can happen this year or not. We have to have some reduced volatility in the debt market. That's my opinion anyway.

[Operator Instructions] The next question comes from Sam Damiani of TD Cowen.

And congrats on a great finish to the year. Maybe Gordie, just on that comment you made about that building in Montreal, may be Airport. Is the replacement lease firm signed up? Or is that still in negotiation? What's the status of that?

No, we've got two binding offers to lease. One of them, we had fully leased on, but what -- two binding offers to lease on that building. So it's, give or take, 100,000 square feet. It's been 90% occupied since we bought it in 2014. After this transaction, it will be 100% occupied starting September 1st, for both of the properties.

Major tenants.

Sorry.

Yes, major tenants and with good covenants and everything we'd expect in basically a [ Class A plus ] industrial building, 3200 [indiscernible] property if you wanted to check on it. So if your -- for your modeling purposes, give or take, $900,000 a year in NOI. So we'll be down 2 quarters on that, but that number will make its way up to $1.5 million, annualized starting in Q4.

Makes sense. That's perfect. Great to see. And just on the credit facility, you tapped into a little bit more. I know you've got some mortgages coming up this year. Is the expectation to up-finance those secured assets, just like this with the strategy on liquidity over the course of 2023?

Yes. So what we're looking at -- other liquidity options at this time and upward financing is it and then the sale of any assets as well. As we're looking at it, it's all fluid right now. If we [ sat ] here the end of December, we thought that the equity markets might be opened by June. But that's clearly -- doesn't look to be the case right now. So yes, we're working on those things. We've got more opportunities that we're looking at. But we'll be obviously being [indiscernible] with it by the end of the year.

Okay. Great then. Just on the outlook for '23, same-property and property assets get meaningfully bigger this year as a percentage of the total portfolio, and I know you've got this bond lease with some downtime, but are you willing to put out a number that you're expecting on same property for the year?

It's Alison here. I think a fair estimate would be somewhere in the 3% to 5% on the same property. I think our industrial will definitely be our leader in that three property asset class, and office might be the last one trailing in there.

[ But when our ] office portfolio will be stabilized. I mean we've got competted -- committed candidate occupancy in 92%. But the bottom of the office same-store, I think we've reached that and we're on the other side of that.

Okay. And just final one, I guess, focus for the short term, for the -- given the volatility is obviously on capital recycling and chipping away at the leverage. But just, I guess, what do you -- how would you say your $2 billion goal has changed in the last 3 months?

I don't think it's changed. I think the goal is dependent on the markets, to some extent, recycling line will help. But as you know, $2 billion is $1 billion more than we have now. So really, the challenge is just the timing thing from that standpoint, right? So -- I mean that's the target that we have. We didn't do any acquisitions in 2020 with COVID. I mean, we got $300 million in 2021. We have [indiscernible] all easily and moved a lot. So it will be, I could say, I guess, the steps might be lumpy just because of where the market is.

Yes. Okay. And just -- sorry, thank you for the additional disclosure in the MD&A. That was very helpful.

You can thank Alison for that actually. She's been very [ diligent ] at increase in our disclosures. So thank you, Alison.

Thank you, Alison.

You're welcome. It's my pleasure.

Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Thank you all.

Thank you.

Thank you.