Pro Real Estate Investment Trust ($PRVUN)

Good morning, and welcome to PROREIT's First Quarter Results Conference Call for Fiscal 2026. [Operator Instructions] For your convenience, the results release along with first 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 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 May 13, 2026, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as at May 13, 2026, 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 financial measures should be considered in addition to and not as a substitute for or in isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the first quarter earnings release for fiscal 2026 and non-IFRS measures section in the MD&A for the first quarter of fiscal 2026 for additional information. I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT.

Thank you, Jenny. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary. Also joining us for the Q&A session is Zach Aaron, Vice President of Investments and Asset Management. We are pleased with our start of 2026 as a pure-play industrial REIT. We continue to execute on our strategic plan and delivered sound operating performance. Despite owning eight fewer properties than at this time last year, we increased revenue, NOI and AFFO while further reducing leverage. Building on several years of strong growth momentum, Same Property NOI increased 6.4% during the quarter, driven by 6.8% growth in our Industrial segment. These results reflect the strength of our tenant base and the embedded lease growth within our portfolio. At quarter end, our portfolio comprised 104 investment properties, totaling 6.4 million square feet of GLA with a weighted average lease term to maturity of 4.3 years compared to 4.5 years at the same time last year. Industrial assets represent 90.7% of our base rent compared to 81.8% a year ago as we continue to redeploy capital towards this segment. Geographically, we further diversified the portfolio across Canada. Manitoba and Western Canada increased to 19% of base rent, up from 9.6% a year ago, while Atlantic Canada declined to 44% from 52.4%. Our targeted markets continue to demonstrate strong industrial fundamentals. In Winnipeg, CBRE reported continued growth in industrial rental rates during the quarter. In Ottawa, increased federal defense spending is supporting near-term demand for both small and mid-bay industrial space. Meanwhile, Halifax industrial rents reached a record high of [ $15.18 ] per square foot, reflecting a strong start to the year. Turning to the portfolio transactions during the quarter. We completed the previously announced sale of a 50% interest, co-ownership interest in an industrial property located in Dartmouth, Nova Scotia, totaling approximately 65,000 square feet for our share of gross proceeds of $5.1 million -- sorry, $5.7 million. Subsequent to quarter end, we engaged in two additional transactions. First, we completed the acquisition of 100% interest in a single-tenant 2024 built 10-year leased industrial building in Moncton, New Brunswick, totaling approximately 60,000 square feet of GLA or $12.3 million and representing a going-in capitalization rate of 7%. This acquisition was financed through a combination of draws on the revolving credit facility and cash on hand from the Dartmouth property sale I just mentioned. Second, we entered into a binding agreement for the sale of 100% interest in a retail property located in Bathurst, New Brunswick, totaling approximately 15,000 square feet of GLA for gross proceeds of $1.4 million. Net proceeds from the sale are expected to be used for general business and working capital purposes. The transaction is scheduled to close in the second quarter, subject to customary closing conditions. Turning to leasing activity. Momentum remained strong during the quarter. As of today, we have renewed approximately 76.9% of 2026 lease maturities at positive average spreads of 34.8%. Notably, five lease renewals commencing in 2026 include rental increases ranging from 40% to 45%. Lease renewals negotiated in 2024 and 2025 and kicking in, in 2026 will provide for incremental cash flow as 418,000 square feet of space realizes new rental rates in September '26 and fully in Q4. Overall portfolio occupancy was 96% at quarter end compared to 97.7% a year earlier. As noted on previous calls, this change was primarily driven by the temporary vacancy at our 176,000 square foot single-tenant industrial property located in Sainte-Hyacinthe, Quebec, following the tenant's decision not to renew its lease in July of 2025. On May 6, 2026, the REIT entered into a binding lease for approximately 74,250 feet of the 176,000 square foot facility located at 6375 Picard Street, and again, in Sainte-Hyacinthe. The new tenant will have a 15-year term -- lease term at market rent commencing in mid-2026. The new base rent on the 74,000 square feet, which is 42% of the total property GLA represents an increase of over 122% compared to the rent paid by the previous tenant for the same GLA in the prior lease. The new lease will provide for incremental cash flows for Q3 and Q4 2026. We continue to actively market the remaining vacant space. Excluding this property vacancy, portfolio occupancy would have been approximately 97.6% at quarter end. With that, I'll now turn the call over to Alison. Alison, over to you.

Thank you, Gordy, and good morning, everyone. We are pleased with our first quarter performance. In the quarter, property revenue totaled $26.9 million, up 4.5% year-over-year despite owning eight fewer properties. The increase is mainly driven by contractual increases in rent and higher rental rates on lease renewals and new leases. Net operating income, or NOI, was $16.1 million, an increase of 8.1% compared to last year due to the same factors. Same Property NOI represents 97 of our 104 properties. This reached $14.1 million. That was up 6.4% year-over-year, including a 6.8% growth from our Industrial segment. The increase was driven by contractual rent escalations, stronger renewal rates and higher rents on new leases. And this was achieved despite a decline in overall average occupancy related to the single tenant Quebec vacancy Gordy mentioned earlier. Our funds from operations, or FFO, amounted to $8.7 million for the quarter. This was up 10.6%, and it was driven by increases in contractual base rent, higher rent rates on renewals and higher rental rates on new leases. This was offset by higher general and administrative expenses due to timing impact of certain professional fees and an increase in interest expense. On a per unit basis, base -- sorry, on a per unit basis, basic FFO was relatively stable year-over-year at approximately $0.13. Basic AFFO payout ratio was 96.6% in Q1 compared to 93.8% for the same quarter last year. This higher ratio was due to the AFFO dilution related to the sale of 15 properties over the past 12 months and the ongoing redeployment of capital towards higher-quality industrial assets. Based on leasing renewals already completed in 2026, we expect the AFFO payout ratio to improve as the year progresses. Net cash flows provided from operating activities were $10.0 million up in the quarter, up 34.1%, mainly impacted by the timing of cash receipts and the settlement of payables. The weighted average capitalization rate for our portfolio remained stable year-over-year at approximately 6.7% at March 31, 2026. Moving on to the balance sheet. We continue to focus on reducing leverage. Adjusted debt to gross book value improved to 47.8% compared to 49.5% a year earlier. Adjusted debt to annualized adjusted EBITDA ratio came in at 8.8x at March 31, 2026. This was down from 9x at December 31, 2025, and in the same period last year. We continue to target further reductions in both adjusted debt to annualized adjusted EBITDA and adjusted debt to gross book value as we continue to scale the platform. At quarter end, our total debt, including current and noncurrent portions, totaled $521.3 million compared to $525 million at December 31, 2025, and $495 million at March 31, 2025. Looking at upcoming maturities. In 2026, we have $157.1 million maturing. Subsequent to quarter end, we secured financing commitments and term sheet totaling $146.2 million on competitive terms, addressing $108.3 million of our 2026 mortgage maturities and supporting the acquisition of the industrial property in Moncton that we just closed on. The financing is expected to be completed in the second quarter of 2026 and will carry fixed term market interest rates with terms to maturity ranging from 3 years to 7 years. In 2027, we have another $46.1 million maturing, mainly tied to high-performing industrial assets in Burnside industrial park. And for 2028, we have $59.8 million in maturities. The weighted average interest rate on these mortgages is 3.9% for 2026. 4.8% for 2027 and 3.5% for 2028. Finally, our distribution of $0.0375 per unit was maintained for the first quarter of 2026. That wraps up our financial review. Gordy, back to you for closing remarks.

Thank you, Alison. We remain well positioned to continue executing on our strategy and to scale our industrial platform in high-performing secondary markets across the country. Mark-to-market rent increases are rolling through our quarters and will provide incremental cash flows as we move through the year. Demand for well-located small and mid-bay industrial properties remains healthy across several of our core markets, supported by limited supply and solid tenant demand. We continue to actively evaluate acquisition opportunities while maintaining a disciplined approach to capital allocation, always with the aim of creating long-term value for all stakeholders. Thank you. Kenny, back to you for the question-and-answer period.

[Operator Instructions] Your first question is from Sam Damiani from TD Cowen.

Congrats again on the good quarter. So you've got a lot of leases either coming online or renewing at significant steps in around the middle of the year in September. Are there any known pending move-outs over the course of 2026 that could offset that step-up in rent that the REITs set to receive?

The only thing we have real knowledge of now is we have 80,950 square feet in Woodstock, Ontario. That tenant didn't renew. So they moved out March 31. That's two of our best buildings in the portfolio, 30-foot clear heights, eat off the floor type stuff. So that's moving ready. The Southwest Ontario market is a little slow right now. But that said, that will negate some of the new acquisition, if you will, and a bit of the -- but when you take the twos and the fros, the new acquisition, the incremental upside in the Sainte-Hyacinthe, property and then some significant leasing steps in end of Q3 and Q4. It shouldn't be that much noticeable as compared to this quarter.

Okay. And just -- that's great color. And just for clarity, is that March 31 vacancy -- is that included as occupied at Q1? Or did...

It was occupied in Q1. They vacated April 1.

Okay. Got it. Okay. Fair enough. Okay. And so there was a small drop in in-place occupancy in the quarter from Q4. Is there any notable or trend or color to share on that movement?

I'll turn it over to Zach to manage just the multitudes of leasing there, and he can probably provide a bit of color.

Sure. Yes. Thanks, Gordy, and thanks, Sam. Nothing noticeable or really pertinent in terms of larger spaces that came empty in Q1 from Q4. I would say just a few small base spaces, mix of Halifax and Winnipeg, but all of our typical kind of plus/minus 5,000 square foot units that were 20%, 30% below today's market. So some of these units we already have deals in the works on that we hope to sign up in Q2 and cash flow Q2, Q3, but nothing significant overall.

Your next question is from Kyle Stanley from Desjardins.

Just going back to the post quarter financing activity, Alison, are you able to disclose the average interest rate that you've got there?

The average interest rate in terms of the new financing?

Yes, in terms of the new financing, the $146 million?

I would -- it's a bit hard to give a natural all-in rate as some of these rates aren't fixed yet. But we're getting financing terms for one example, on 7-year money, we're getting 157 basis points over the 7-year bond. On another deal priced over Quora, we're getting 165 basis points. And then I think there's another one...

I think we have a term sheet for maybe 160 basis points over 7-year money.

160 basis points over 7-year money as well. So we're seeing really good spreads overall on our financing and healthy appetite to get 65%, 70% LTV kind of with no problem. And just using kind of the 5-year bond as a standard point. We seem to be getting pricing in and around the kind of 160 basis points, 165 basis points over, give or take.

Okay. Perfect. That's good color.

Okay. Kyle, we have some flexibility on when we fix that. The -- we've got [ documents and letters ] for two of these three finances. So it's just been watching almost the week really and maybe we get a 10 basis point break -- it's been a little rough the last week or so. But yes, we're in the 4.75% to just below 5% range. So maybe we get a good week and save 10 bps on that, but that's kind of worth, right?

Okay. Fair enough. No shortage of volatility in the rate market. I agree with you there. Just moving over to acquisitions. So last quarter, obviously, and maybe for a few quarters now, you've highlighted seeing some opportunities in Winnipeg, Quebec City. Obviously, your leverage did improve again this quarter. So just wondering where the acquisition opportunity set stands today? I think you've indicated in the past that you'd be willing to take leverage up for the right deal. So in addition, how much acquisition capacity do you see in your existing kind of equity base?

Yes. I mean we'd like to stick around the 49% to 51% range. I mean it took a lot to get there. So we're not going to -- unless we have a plan to reduce it again, significantly above that, obviously, we don't get the benefit of that anyway. So right now, we have $30 million to $40 million of acquisitions room, if you will, on our balance sheet. So we're actively looking at those -- there's a lot of deals out there, and we're working on some of them. And so that room $30 million to $40 million would be hopeful that we could land that in the next little bit.

Okay. And then just going back to one of Sam's questions. You talked about all the puts and takes on the timing of leases starting and some vacancy in the acquisition. As we look at your Same Property NOI growth this quarter and the high 6% from the industrial portfolio, when we kind of look at all those puts and takes, is it fair to assume that we should expect that to start to ramp towards year-end as some of those bigger renewals come online?

Yes. I mean, again, there's lots goes on in the quarter with 104 tenants here. I mean the 6.8% on the industrial basis you're comparing the [indiscernible] vacant building to when it was fully leased. So it would be above 6.8% if that was excluded from the math or fully leased. So yes, I think we're looking for some -- we've talked about mid- to high single digits. So hopefully, we'll see a bit more of that. We do have the 80,000 square feet, which will be a negative obviously on Q2, but -- and the acquisitions don't go into the same store, obviously. So I can't see why we would be below the mid of the pack there. So we're hopeful to see some 6.8% is strong. So -- but we'd like to hope to see that a little bit higher. But we just honestly haven't done the math in Q4 we have…

[Operator Instructions] And your next question is from Brad Sturges from Raymond James.

Just continuing on with the acquisition theme. I think you've talked about in recent quarters, there's been a bid-ask spread in the market, and that's kind of held back some of the opportunities that you could execute on. Now that you're, I guess, talking about a little bit more opportunity, does that suggest that the bid-ask spread has been narrowing and you're seeing vendor expectations change moving more towards where you guys might be underwriting assets?

Yes. I think there's some public deals out there that have been marketed and whether we won the deal or a piece of the deal or not, there's assets under contract. So I think that would say -- and Zach can comment about some deals that have gone on that we weren't involved in. But I would say that there's a meeting of the middle there to get some transactions done. So I think that's pretty positive. Zach, do you have any comments on that?

Yes. At a high level, my answer is kind of yes and no. I think we've definitely seen some deals come to market in our -- in and around our core markets where the pricing style seems to be at a level that we would expect and be interested in that. But at the same time, we'll still get off-market opportunities, again, in our markets and not our markets where the pricing still seems to be at a level that just doesn't match today's reality. So the answer is a bit of both. But from what we see in the market in terms of bid depth on some of the opportunities that have been brought to market on industrial, call it, in GTA or Winnipeg or Montreal, there still seems to be a very healthy amount of capital and institutional capital bidding and chasing these opportunities just with more discipline on pricing.

At this point, are you mainly looking at existing markets? Or have you changed your strategy a bit and kind of looking at new markets, Alberta being an example?

No. I mean we're still focused on the existing markets. We'd like to eventually move to Alberta. We kicked the tires on some stuff there. That would be an example where pricing expectations don't align at this point. So yes, it's in and around our current markets. I mean, if you haven't noticed in our MD&A this quarter, we isolated Manitoba instead of falling to Western Canada just because we have 1.3 million square feet there. And then we have assets in Quebec, Atlantic Canada, Ottawa. So I mean that's still our focus. Alberta is just discussion of if we could get a significant portfolio of small mid-bay assets there, we'd be interested in setting up a platform. It's just -- whenever we look, there's just always a disconnect on value. So that's a frustration we have there.

Got you. Last question, just to go back to the financing activity. On the $108 million that's being refinanced, what's the expiring -- the average expiring rate on that?

That Alison like 3.8% or something like that?

Yes, approximately 3.8%.

The next question is from Sam Damiani from TD Cowen.

I did notice that the WALTs on the Government of Canada tenancy did increase by about a year from Q4, but it's still less than 3 years. Can you -- is there any color to share there in terms of why didn't it go longer? Or what sort of is going on there?

I'll chime in. I mean we have several government of Canada tenants in the portfolio across Ottawa and Halifax. So it's not tied to any one deal. There are some spaces larger that their expiries are just coming up soon in '27, '28 and conversations haven't started yet. And there are some spaces, particularly in Burnside, where we've just recently completed or yes, completed some renewals, but on relatively smaller spaces. So I think that's really the story there, not that there is a story, frankly. Just yes, we've completed some renewals and then on some larger spaces, just those discussions haven't started yet as they're still a year or two away.

I.e., we haven't done like less than 5-year deals or anything like that, right, Zach like just…

Like on Burnside, they're all standard term, if not longer-term deals.

Okay. All right. That's helpful. And just finally, I guess, the lease roll does tick higher in 2027. Is there anything in that year that is, I guess, more concerning than the rest?

As of right now, I have nothing to speak to in terms of any known coming vacancies. We're just starting to engage some of the larger 2027 expiries. From the few conversations I've had so far, all very preliminary, more positives than negatives. But again, still very preliminary. No paper has been created yet, but I expect and hope that we'll start to get some action on some of these groups in the next quarter or two.

Zach a lot of that's Winnipeg, right?

Yes, there's a decent chunk coming due in Winnipeg, some of it from the latest acquisition we did last summer and then some just in our historic portfolio. Yes. All those rents too are, as you can kind of expect, still below market with healthy upsides.

Okay. That's all helpful. And just last one on the interest expense, was there anything unusual in there that might have offset the reported sort of net expense number. It just seemed to have dropped a bit versus the Q4 run rate?

We did have a small correction in the quarter. It was about $80,000 that reduced our interest expense that was overstated in the last quarter.

Thank you. There are no further questions at this time. Ladies and gentlemen, that concludes our conference call for today. Thank you all for joining. You may now disconnect your lines.