BTB Real Estate Investment Trust (BTBIF) Q2 2023 Earnings Call Transcript

BTB Real Estate Investment Trust (OTC:BTBIF) Q2 2023 Results Conference Call August 8, 2023 9:00 AM ET

Company Participants

Michel Léonard - President and CEO

Mathieu Bolté - EVP, COO, and CFO

Conference Call Participants

Mark Rothschild - Canaccord

Matt Kornack - National Bank Financial

Gaurav Mathur - iA Capital Markets

Operator

Good morning. My name is Chanel, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust 2023 Second Quarter Results Conference Call for which management will discuss the quarter ended June 30, 2023. [Operator Instructions] Should you wish to follow the presentation in greater detail, management has made a presentation available on BTB's website at www.btbreit.com-investors-presentations-quarterly meeting presentation. [Operator Instructions]

Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve numerous factors and assumptions and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved.

Several important factors could cause BTB Real Estate Investment Trust's actual results to differ materially. From the expectations expressed or implied by such forward-looking statements, these risks and uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust's Management Discussion and Analysis and its annual information form, which were filed on SEDAR and on BTB's website at www.btbreit.com-investor-reports.

I would like to remind everyone that this conference is being recorded. Thank you. I will now turn the conference over to Mr. Michel Léonard, President and Chief Executive Officer; and Mr. Mathieu Bolté, Executive Vice President, Chief Operating and Financial Officer.

Mr. Léonard, you may begin the conference.

Michel Léonard

Thank you very much. I'm pleased to present our Q2 results. If we look at our portfolio, just as a summary, we own 6.1 million square feet of real estate divided amongst 75 properties for a total IFRS value a little bit north of $1.2 billion. During Q2, we did proceed with an acquisition of an industrial property of almost 84,000 square feet in Edmonton. We do -- we are pursuing our densification of certain properties that we own, mainly in the retail segment.

We think that there are 6 potential properties, one of which we've discussed at length and it's moving on a slow pace, but confidently on that slow pace. Our investment activity, as we're all aware, we are focusing our investment in the Industrial segment, and we do have a good pipeline of value creation.

If we look at our evolution of our -- the position of our properties, we see that in Q4 2020, we own 18% of industrial properties, and now we are at 34%. So a growth that is quite fast. And what's happening is that when you look at our off-downtown core office segment, we're seeing being reduced from 55% at the end of 2020 to 45% today, and we wish to pursue that activity. With an objective of owning 60% of our portfolio in the Industrial segment and 20% in Retail and 20% in the off-downtown core office segment.

We did proceed with our geographical diversification of our portfolio through the last 2 years. So it's important to note that in Edmonton, we didn't own any properties in Q2 2021. Now it represents 7.7% of our portfolio.

In Saskatoon, nothing in 2021, 3.9% today. Ottawa, we were 20%, now we're down to 14% as a result of the activity in the Industrial segment. Our off-core office is going down. In Québec City, same notion. We were at 25.5% overall, and we're down to 18.6% today. Montréal, relatively stable, 54% in 2021 and 55% today.

So the diversification is working quite well. As I mentioned, 6.1 million square feet. An important activity during the quarter for renewal and new leases that were concluded of 333,000 square feet, nice uptick in the occupancy rate, the committed occupancy rate at 94.1%. And we did file during the quarter renewal, I call it the renewal of our base shelf prospectus. So we had one that was maturing, and we did the fact we'll it for a period of 25 months.

If we go to our leasing and renewal activity. So we did conclude the 125,000 square feet of new leases in Q2. And the lease renewals, if we look at it, as a whole, it was 164,000 square feet, 70% out of the 233,000 square feet that were maturing and concluded 44,000 square feet prior to the end of the term during this quarter. Of the 69,000 square feet that expired during the quarter and not renewed, we did lease -- almost 56,000 square feet to a new tenant, TireCraft in Edmonton. When we acquired this property in Edmonton, we knew that EPCOR was centralizing its operation and as a result, was leaving the property.

And given the maturity of the lease, we were able to rapidly lease the space to TireCraft and at a rate of almost 37% higher than the rate that EPCOR was paying us.

If we look at additional new leases concluded, so we did conclude 30,000 square feet with Continental Capital and Thurber Engineering of almost 10,000 square feet in Ottawa. What's noteworthy also is that we achieved a cumulative average increase of 6.2% in the rent renewal rate since the beginning of the year in the off-downtown core office and 5% in the -- excuse me. Yes. So 5% in the off-downtown core and necessity-based retail at 4.2%. So a very healthy leasing activity.

And with this, I'll ask Mathieu to delve into the details of the financial highlights of the quarter.

Mathieu Bolté

Thank you, Michel. Good morning, everyone. So we're pleased with the financial results of the second quarter and the stability of the portfolio. We continue to add on positive industrial acquisitions and are looking to recycle capital in an organized fashion to reduce our office exposure. In the second quarter, we benefited from the full impact of last quarter acquisitions to the Lion Electric, battery plant in Mirabel. The portfolio, as Michel mentioned, allocation by asset class is evolving in line with our strategic plan with now more than 34% of the investment from the industrial side.

Rental revenue increased by 9.4% compared to the same period last year, considering the acquisition net of dispositions and operating improvements mainly consisting of higher lease renewal rates and improved occupancy rate.

Net operating income increased by 8.2% compared to the same quarter last year. Same property NOI increased by 1.7% year-over-year. Here, I just want to clarify the 3 asset classes. So the Industrial segment decreased by 3.9%, but it's just a reason of timing between the known departure of the tenant that, again, Michel mentioned previously, that was -- that happened at the beginning of the quarter, and we were able to replace it at the end of the quarter, so in June. So it's really just a quarter impact.

So if we look at this asset class, we should be at a run rate of plus 1% since we didn't have any renewals in industrial year-to-date.

The off-downtown core office segment decreased by 1.8% due to the decrease in the occupancy rate but it's specific to the Québec portfolio year-over-year, and we're just actively focusing on the leasing efforts and the strategy in that specific region. And the necessity-based retail segment increased by 15.9% and it's really due to the high demand for our sites and the lease increase.

Recurring FFO was [$0.118] per unit for the quarter compared to [$0.114] per unit for the same period in 2022. On a cumulative basis, the recurring FFO per unit was $0.235, which represent an increase of 6.1% compared to last year. Recurring AFFO payout ratio was 69%, so it's in line with last year.

Looking at the capital structure, the weighted average mortgage interest rate was 4.28%, so it's 66 basis points higher than 12 months ago. This increase is mainly due to the increase of the average rate of variable interest on mortgage loans, which increased by 337 basis points year-over-year to 6.98%. It's important to just keep in mind the cumulative balance of The Trust loan subject to variable interest rate was only $37 million, so it's less than 5% of the mortgage book.

In comparison, the weighted average for fixed interest rate increased by 23 basis points year-over-year to 3.85%. The Trust concluded the quarter with a total debt ratio of 58.9%, so it's a slight decrease of 0.4% compared to the end of last year.

For our refinancing commitments for this year, we have $49 million of mortgages coming to maturity during the next 6 months, for which we already have commitment letters for $36 million. So there's only $13 million less that we're working at the moment.

And finally, Trust held $3.7 million of cash at the end of the quarter and $23.7 million is available under the credit facilities. We did increase the available amount under our credit facility by $10 million, and we still have an option to increase it by an additional $10 million.

So this completes our presentation, and we'll move to the Q&A.

Question-and-Answer Session

Operator

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

Mark Rothschild

Michel, when you're talking about the asset class diversification you were like, does that assume that you just won't do acquisitions in other areas and the growth will be mostly in Industrial? Or should we expect you to continue finding deals in other asset classes? I'm just trying to understand how you envision this asset class diversification playing out over the next couple of years?

Michel Léonard

We are concentrating in the Industrial segment, Mark. We're not looking at investing in the other segments.

Mark Rothschild

So to the extent you find a greater volume of deals, you have the capital, that number can grow well above 60%?

Michel Léonard

Yes. It's just that -- like what I'd like to -- for all to understand is that we are basically shifting or pivoting to the Industrial segment in an organized fashion. So we're not going to, all of a sudden, sell at discounts and so on. We are -- the properties that we have in the other segments are doing extremely well. You're seeing it from our numbers. And as a result, it would be very difficult for us to all of a sudden do a fire sale. We're not in the fire sale business. So we are operating our properties and they're producing good revenues.

You saw that we do have an issue in Québec City, where in that city, the numbers that we publish about Québec City are a little bit skewed because we have 3 rivers that slumped into Québec City. But three Rivers, we have -- we own 1 property and it's 60% occupied. And that's basically an impact, I think, of roughly 3% on the Québec City portfolio.

So we do -- but we do have -- if you look at our portfolio in Ottawa, you look at our portfolio in Montréal, in Western Canada, you see that the numbers are very high as far as the occupancy rate is concerned. And now we're really concentrating on Québec City in order to better our rates of occupancy. And for that, we have to better the performance of that portfolio before even considering eventually selling those properties.

Mark Rothschild

Understood. And maybe with some of the other markets that you're in outside of Québec. To what extent do you believe that you have to have presence in these markets over time to justify going there? Or does that not really matter each asset individually work?

Michel Léonard

It doesn't really matter because we've already -- we have boots on the ground in Edmonton already. So it's not a matter of flying out there every month in order to have a look at our properties. So we do have boots on the ground. So we have -- I mean I think that the critical mass of the portfolio calls for boots on the ground anyway. And as a result, we've hired -- we made the commitment to hiring somebody and furnishing whatever we need to furnish to that individual in order to do his work properly. So we're committed.

Operator

Your next question comes from Matt Kornack with National Bank Financial.

Matt Kornack

Just with regards to the lease maturity profile, I mean, you're sitting at pretty low in-place rents on both necessity-based retail and the off-downtown core office portfolios. I mean, do you believe that, that provides a bit of upside in 2023 in terms of where spreads will be. And then as we look into '24, I mean still office here at [$15] rents and necessity-based retail is just a tad over [$10] like I'm just trying to think, A, how that helps from a tenant retention standpoint? And B, kind of what the opportunity is there from a lease standpoint.

Michel Léonard

I'll give you an example. We have a government lease that's coming to maturity. It's a substantial lease that right now, the government is paying $6 net for part of the space and $1 net for the other part of the space, which is a lease that was in operation when we had acquired that property was a long-term lease. And right now, the renewal rate is for part of the majority of the space at $10 net. And the other part, I think, is at $4 or $5 net, so a substantial increase is coming our way in the form of that government lease, which is roughly 60,000 square feet.

So yes, there is an opportunity to increase rents, and that's what we're working on. Where we have less of an opportunity in the Industrial segment because, yes, there are leases that come to maturity, but it's not really substantial. And we would love to be able to open certain leases before maturity in order to increase rents and bring them to something that would be akin to market rents, but let's say, a little bit lower than market rents, but definitely creating an adjustment.

So, we have our strategy in place on that front, but we do know that whether the Retail segment or the Office segment is going to produce more revenues as a result of the numbers that you're talking about.

Matt Kornack

And are you finding that at this point, you're needing to put capital into these assets to lease them? Or are they in okay shape for the purpose of the tenant at this point?

Michel Léonard

Not more than what we've done in the past.

Matt Kornack

Okay. And then is there any update with regards to kind of the density potential on the retail sites and monetizing that and where we currently stand at this point in terms of those coming in...

Michel Léonard

We are waiting for -- the city has started the process of affecting the zoning change, so the process has begun. We're part of it. And as a result, there's going to be presentations to citizens at the end of August, beginning of September. And we will know where this thing is going at the end of October.

Matt Kornack

And then lastly for me, just on the balance sheet. Just what is your approach at this point to liquidity and just in terms of the potential for future asset sales, obviously, if you can get the density, that's 0 cap rate stuff. That's great. But how else do we see kind of the balance sheet progressing? And where would interest rates be at this point on kind of secured financing across the portfolio?

Michel Léonard

One aspect that we didn't talk about this morning, Matt, and I think that it's relative to the balance sheet, and I'll let Mathieu answer the rest of your question regarding interest rates. But we do have certain properties on the market, and we're seeing that we have buyers for these properties. So hopefully, we are going to be able to redeploy capital on that front as well in the -- not in the third quarter, but possibly in the fourth quarter. Interest rates...

Mathieu Bolté

Yes, just maybe one thing because you talk about density as well. I think we think that it's highly probable that the density project will happen and we'll be able to free up equity from that project starting next year. . Although we still have to wait for that. So we have to plan as well plan B in terms of current refinancing and managing line of credit.

In terms of interest rate, as I mentioned, there's not a lot of exposure in terms of refinancing for the end of this year. We're talking about for the $47 million that is left, we're talking about 200 basis points in terms of higher interest rate versus what is coming to maturity. So that's in the short term .

Matt Kornack

And I just -- for your 2023 exposure, most of that's already variable rate, if I would get...

Mathieu Bolté

Part of it, yes. part of it, we have -- we don't have a lot of variable exposure, but we do have 2 properties out of the $47 million that are variable. So those are already adjusted.

Matt Kornack

Okay. So for the near term, it's less exposure, I guess, 2024, there's a bit more at 4.5% or so. .

Mathieu Bolté

Yes.

Matt Kornack

Okay. And then just, Michel, going back to your comment on the disposition side. And what type of buyer is it that's looking at these assets at this point? Is it high net worth individuals, family offices, et cetera? Or there are some institutional guys looking at this point.

Michel Léonard

Definitely no institution and it's a high net worth and family office that we're seeing that are harvesting these acquisitions.

Operator

Next question comes from Gaurav Mathur with iA Capital Markets.

Gaurav Mathur

Just staying on the balance sheet for the moment here. When you're looking at your debt ladder for 2024, that's about 19% of your debt coming to maturity, how are you thinking through refinancing versus repayments for 2024?

Mathieu Bolté

Well, in terms of refinancing, we do plan to refinance all those loans. Most of them is a lot of small assets. I think it's -- in total, it's 18 properties that we have to refinance, so we don't have large, big assets with more risk to refinance, for example. It's not the case for next year, but it's going to be some work just to have all the smaller assets to be refinanced, but I don't see any risk. And we're trying just to be proactive with those. I mean some -- I think there were 6 assets that have to be refinanced in January. So we already started to work on those. And it's mainly with 1 bank. So the discussion is ongoing at the moment.

Gaurav Mathur

Okay. Great. And then just switching back to the leasing activity this quarter. Retail definitely stood out. Could you just talk a little about what kind of tenants are looking for space and are willing to provide this rent bump up?

Michel Léonard

Well, mostly national tenants. We have Québec City in Lévis, proper Lévis we own a center where it's grocery anchored by Walmart. We renewed the lease of Walmart 2 years ago for 10 years and there were, I think, 3 years left. So maybe we still have another 12, 13 years left on that lease.

And for -- as reported by others, there's an immense leasing activity in the Retail segment, especially from national retailers. And in that center alone, it seems that national retailers just understood that people that live on the South Shore of the Greater Québec City area, don't go to Québec City to shop. And the people from Québec City proper don't go to the South Shore to shop. And that creates an immense opportunity for retailers. And we're basically, I don't want to say the only game in town, but let's say that we're the only game in town.

And as a result, we were able to lease space to BBW. We leased space to Sephora, and now we're in, again, in LOI, situation with a national retailer for 12,000 square feet. We're an NOI stage with another national retailer in order to build density on the site for 43,000 square feet for a retail store. And so all of a sudden, we're changing the face of that retail center. And there is a lot of opportunity that exists within this area.

And our leasing team has done a tremendous work in order to attract, discuss these tenants. And all this started from -- if you remember our last call, I talked about ICSC in Whistler, where we met a lot of retailers that were ready, willing and able to lease space nationally and a lot of them wanted to concentrate in the Québec province. So as a result, we're reporting -- I mean, we didn't talk -- obviously, in the MD&A, we're not talking about the LOI with this 43,000 square feet tenant, but because it's still conditional and all this, and we can't report -- nor -- really discuss it until the lease is firm and sign. But we're nearing that opportunity there.

So -- and I saw the -- your report, Gaurav, when you talk about Plaza and Plaza is basically experiencing the same kind of traction within its own portfolio. So it looks that the dire days of the retailers are basically over, and we're talking about a new day, and it's really -- it's fun for us because it allows us to redensify a site and create new opportunities for our tenants. And in that particular site, basically, I don't want to say it crudely, but let's say, I'll say it anyway, getting rid of some troublemakers as far as tenants are concerned.

Gaurav Mathur

Okay, great. Well, good to know the reports are read. But that leads me to my next question. As these national retailers come in and occupy the space on the lease structure, are any of these rent increments or rent escalators linked to CPI?

Michel Léonard

No. They generally fix rents, let's say, we do a 10-year term. Usually, we fixed rents for 5 years, and then there's a bump for the next 5 years. That's sort of the pattern. They don't grow by CPI.

Operator

[Operator Instructions] At this time, there are no further questions. Please go ahead, Mr. Léonard.

Michel Léonard

Well, thank you very much for participating this morning. Appreciate your participation after your 3-day weekend for most of us. As you could see that there's a lot of leasing velocity occurring, and as we reported in our MD&A, not only is it in the Industrial segment where we're full, but it is also in the Retail segment, and to our -- I won't say surprise, but the fact that there is a lot of traction in the Office segment is really pleasing to us, and we're seeing that tenants are increasing their spaces.

We have very few tenants that are giving back their space. Mainly, none. And so as a result of this, we're seeing expansion in the office sector, mainly from professional firms. We have accounting firms expanding, engineering firms expanding, engineering firms moving into new areas. And so based on this, we're quite pleased with the performance of our portfolio, and we feel that it's going to continue throughout this year. So the first 6 months were extremely busy. On the leasing front, lease renewal front, and I can even give you some color. There was a large tenant, 18,000 square feet wanted to renew. However, wanted to basically give back 5,000 or 6,000 square feet. By the time we concluded the transaction, they renewed for 18,000 square feet.

So I hope this is a trend. But in our portfolio, we are definitely seeing it as a trend. And I think that this is as a result of the fact that our properties are located in suburban areas, and there's more traction -- leasing traction in suburban areas than there are in the downtowns. We don't talk publicly or there's no real discussion publicly of the traction in the suburbs. Most of articles that we read are about downtowns of this in North America. But we're seeing a different trend. And hopefully, it's sustainable, and we really hope that this is turning the corner, albeit slowly, but definitely showing some signs that we're turning the corner.

So thank you very much, again, for your participation. We enjoyed publishing our numbers. It's always fun when the numbers are good. So, good to great. So thank you very much, and we'll see you next quarter.

Operator

This concludes today's conference call. You may now disconnect.