BTB Real Estate Investment Trust (TSX:BTB.UN) Q1 2024 Earnings Call

0:00 Good morning. My name is Julie, 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 2024 First Quarter Results Conference Call, for which management will discuss the quarter ended March 31, 2024. All lines set in place until mute to prevent any background noise. Should you wish to follow the presentation in greater detail, management has made a presentation available on BTB's website at www.btbbreathe.com, Investors Presentations Quarterly Meeting Presentation. After the speaker's remarks, there will be a question and answer period reserved exclusively for analysts. If you'd like to ask a question during this time, please press the star followed by the number one on your telephone keypad.

0:52 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 trusts' actual results to differ materially from the expectations expressed or implied by such looking-for statements. These risks, uncertainties, and other factors that could influence actual results are described in BTB real estate investment trusts' management discussion and analysis and in its annual information form, which were filed on CEDAR and on BTB's website at www.btbbreathe.com, Investors Reports. I would like to remind everyone that this conference is being recorded.

1:59 Thank you. I will now turn the conference over to Mr. Michel Léonard, President and Chief Executive Officer, joined by Mr. Charles Doré-Bédard, Senior Director of Finance, and Ms. Stéphanie Léonard, Senior Director of Leasing. Mr. Léonard, you may begin your conference.

2:20 Thank you, Julie. And I'd like to add that Bruno Meunier, Vice President Operations, is also with us this morning. Basically, the story for Q1 2022 is the result of great leasing efforts. where it be leasing for renewals of leases or leasing associated with accommodating new tenants in our properties. With that, we saw that the same property NOI grew by 4.7%, and excluding a one-time revenue adjustment in Q1 that was taken in Q1 2023, our rent revenue increased by 3.7% to $32.6 million. Our average lease renewal rate during the quarter was 8.4%, and we have a committed occupancy of 94.5%, which is an overall record for BTB's lifetime.

3:15 The same property NOI increased by 4.7% year over year to $17 million, and excluding a one-time adjustment, as I mentioned earlier, The adjusted AFFO increased by 2 cents per unit to 8.9 cents. The AFFO payout ratio for the quarter was 83.9% and as the distribution remained at 30 cents. With this, given the fact that it is an important story regarding leasing, I will just briefly go over the investment activities. As far as the investment activities are concerned, we dispose of two small suburban office properties, which is in line with our business plan, which is to dispose of office properties in order to redeploy the capital in the industrial segment.

4:06 Regarding the densification efforts that we are investing in three sites presently, we are working towards a new change of zoning within the year, and we're very confident that in most of these instances, it will happen during the year. When we look at our real estate portfolio, the industrial stands at almost 37%. The suburban office is down to 43%, and necessity-based retail at 21%. As far as our geographical diversification, we hold almost 23% of our properties in Quebec City, 54% of our properties in Montreal, 13% in Ottawa, almost 4% in Saskatoon, and almost 7% in Edmonton. Regarding the prime development opportunity that we talked about, which is the densification in Lévis, Quebec, which is close to Quebec City, we are beginning the construction of a winners for 43,000 square feet.

5:12 adjacent to our Walmart that is located on the Megasant Rivesud site. So we anticipate that construction will last between 12 to 14 months, and winners will start paying rent in 2025. I talked about the development opportunity in Ottawa. Again, we're very confident that in Ottawa, next to our Queensview property, the site is going to receive a change of zoning for residential densification opportunities. So as far as our key metrics are concerned, we own 6.1 million square feet. The net asset or fair value of our investment property stands at $1.2 billion. The leasing activity, total leasing activity for the quarter at 154,000 square feet.

6:02 And as I previously mentioned, an occupancy rate at 94.5%. With this, I'll ask Stephanie to take you through the leasing efforts for the first quarter of 2024.

6:15 All right. Good morning, everyone. For those of you who are following us on our presentation online, just wanted to note that we are at page nine. So as Michelle just mentioned, the total leasing activity for the quarter totaled 154,000 square feet, just rounding up here, out of which 96,000 were concluded with lease renewals and 58,000 with new leases signed. In terms of significant lease renewals, we concluded... And Canada Post out in Quebec City. Both of them showing average rent increases of 7.9% and 14.3% respectively for each renewal. In terms of our average increase in our lease renewal rate, we're looking at 8.4% for the quarter as Michelle mentioned.

7:07 In our suburban office segment, we're looking at an increase of 8.6%. And in necessity-based retail, 7% increase. There were no lease renewals concluded in our industrial segment. In terms of our new leases, again, our suburban office segment continues to show its strong velocity. We concluded a 27,000-square-foot new lease with Azuka Canada Pharmaceuticals at our property located at 2250 Altre-Nobel. as well as bird construction for 11,000 square feet as well at 2250 out in the techno park. So both of these are located in Montreal, as well as a 10,000 square foot new lease in Quebec City with a labor union of government employees. So as I mentioned, suburban office, again, very strong for us this quarter.

7:52 About 90% of our total new leasing activity was concluded within the segment. 3.4% of our new leases were concluded in industrial and 6.2% in our necessity-based retail segment. In terms of renewals that we've concluded in anticipation, as you know, we're proactive in terms of managing either our expiries in 2025 and 2026. or anything that is beyond our current quarter, we concluded about 4,000 square feet in anticipation of expiries for the years to come. And all of this activity totaled an occupancy rate of 94.5%, as Michelle mentioned, an all-time high for BTD. Just turning to page 11 now to give you some color on our new leases.

8:38 As I mentioned, Bird, Azuka, that were signed at 2250, as well as the SFPQ, out in Quebec City at our property located at 6700 Pierre-Bertrand. Just turning to page 12 now in terms of our renewals. The city of Saint-Jean-sur-Cour, I apologize, five-year renewal for 23,000 square feet, 7.9% increase in our renewal rates. Then we have Canada Post, 23,000 square feet with a 14.3% increase in our renewal rates. We also have the Government of Canada with a one-year renewal for 8,600 square feet. I just wanted to mention in terms of new leasing dynamics with the Government of Canada, we're currently in negotiations for 15,000 square feet of additional square footage at 825 Le Bourgneuf.

9:31 And as well, we concluded our lease renewal for 13,000 square feet for five years with Shoppers Drug Mart at a 10.8% increase in our renewal rate. So, short and sweet for Q1. However, we continue to sustain our positive leasing dynamics, and I expect that our Q2 results should be continuous with this trend. With this, I will turn it over to Charles Deray.

9:57 Thanks, Stephanie. Good morning, everyone. The operating results for the first quarter of 2024, again, show the trustability to stay profitable despite an increase in interest expense. Quarter over quarter, rental revenues decreased by 0.8%. However, if one doesn't consider this one-time adjustment of $1.4 million recognized in the first quarter of 2023 related to unrecorded revenue from previous quarters associated to a specific lease, rental revenues would have increased by 3.7%. The evolving composition of our portfolio is also a benefit where industrial segments now account for 26.4% of our total revenue versus 21.2% for the same period last year. and 33.9% of total NOI versus 28.1%, again, versus the same period last year. Same property NOI increased by 4.7% compared to the same quarter in 2023. This is mainly due to the strong leasing efforts mentioned by Stephanie and Michelle that were made during the first quarter of 2024, but also cumulatively done in 2023, which resulted in an increase in the in-place occupancy rate of 130 basis points compared to the same quarter in 2023, again, an all-time high.

11:05 The portfolio showed an increase in rental rates for lease renewals of 8.4% for the current quarter for the suburban office segment and for the necessity-based retail segment. Again, an overall increase of 9.2% for the year 2023, which is right now shown in the SPNOI that's increasing by 4.7%. For the quarter, SPNOI for the industrial segment increased by 3.5%, for necessity-based retail segment, 10%, and the suburban office segment, 2.8%. The continued leasing velocity for both the retail and suburban office segment is reflected in the SPNOI growth. Adjusted FFO per unit was 10.2 cents per unit for the fourth quarter, a decrease of 1.5 per unit compared to the same quarter last year. Again, if we exclude the one-time adjustment, adjusted FFO unit would have increased by 0.2 cents. Keep in mind, adjusted FFO per unit is also negatively impacted by the increase in weighted average number of units outstanding of around 4 million units, which is mainly due to the unit holder's participation in our trip plan.

12:08 Adjusted FFO for the quarter decreased by 1.1 million, mainly due to an increase in end financial expenses of 0.7 million, and if we account for the previously mentioned 1.4 million one-time adjustment recorded in Q1 2023. These decreases were offset by 0.6 million increase in NOI, again, due to the positive contribution of lease renewals, The increase in financial expense is mainly caused by an increase in the average weighted interest rates for mortgages of around 20 BIPs from 4.2% last year to 4.4% this quarter. As a quick reminder, BTB during the later half of 2023, we proactively externally appraised 75% of the fair values of our portfolio. During this quarter, we discussed with our external appraisers and concluded that no further adjustment was necessary and current market assumptions were still properly reflected in our properties.

12:57 It is important to note that for the last two years, BTP did reduce the fair value of its offered portfolio by a total of 59.3 million, or 11.4% of the fair value of the offset segment. Now, if we look at the capital structure, BTP concluded the quarter with a mortgage debt ratio of 51.3%, an improvement of 90 bps compared to December 31, 2023, and a total debt ratio of 58.3%, an improvement of 22 basis points compared to the same period. For the remainder of 2024, a total of 113.4 million of mortgages will come to maturity. The Trust has been proactive in commencing negotiations with its lenders and, as of today, refinanced 16.4 million of the 113.4 million. Moreover, we received commitment letters from financial institutions for all or almost all mortgage loans coming to maturity prior to June 30 of 2024.

13:50 As such, we are already engaged in securing financing for the remaining mortgages maturing in the second half of 2024. This completes our presentation, and we can move on to the Q&A. Thank you. This is the conference operator. At this time, I would like to remind everyone that the analyst may now ask their question by pressing star 1 on their telephone keypad. Again, if you'd like to ask a question, press star 1. We'll now pause for a moment to compile the Q&A roster. Your first question comes from Matt Karnak from National Bank Financial. Please go ahead.

14:27 Good morning, guys. I appreciate the commentary on the leasing that you've done post-quarter. Can you give us a sense, for those suburban office space that were leased, was that on vacant space or was that on kind of space that will be vacated in the future? I'm just trying to gauge whether we should expect in-place occupancy kind of to trend towards that. 94.5% committed ratio.

15:02 Yeah, good morning, Matt. So in terms of the two leases that we concluded at $2,250, so Azuka, just to explain what happened here is that we had, it was a current tenant that was, it was a tenant whose lease was up for renewal. They had an option to terminate in their lease, therefore they exercised their option. However, we were able to negotiate to solidify a long-term tenancy with them. So we had an in and an out situation. That's why our occupancy rate is still at 94.5 because of the new leases. However, it was an offset through a SUCA. So our occupancy rate stays the same and our lease renewal rate took a little dip because Asuka's departure, however, was supplemented by a new lease. Asuka is going to be firm committed for eight years, no option to terminate, so our occupancy rate will remain stable with them.

15:54 For Bird, it was vacant space, so for them, it's completely just brand new leasing on that front. And for SFPQ in Quebec City as well, it was vacant space and they're going to be there for further tenancy. So we're pretty much all vacant space that was leased except for a SUGA that was an in and out.

16:14 Okay, that's great. That color is appreciated. With regards to... just the cost of doing these leases. It seems like you're getting pretty good spreads and your CapEx hasn't really moved materially higher. This quarter was actually below your average, your historical average. How are you achieving this in the context of the current office market and any color you can provide as to where you think leasing spreads and CapEx trend over the year would be great?

16:46 Well, because we own suburban office, it seems that the cost of retrofitting space is a little bit, it's a lot less, I should say, than if we were in a downtown environment. And what we're seeing is in renewals, we're not really spending more, and I'm talking about the office segments, We're not seeing more than on average $25 to $30 max. Whereas in new leases, we're seeing maybe $40, $45, which is a lot less than what one could expect in a downtown environment where it could be $100, $120 a square foot. So we're far from that.

17:33 But however, there's a trend that we're seeing where And if I can go back, in the 80s, people or companies were taking their spaces with 80% closed, 20% open. Then it moved to 50-50. And then it went to the reverse, 80% open, 20% closed. And what we're seeing is that there's more and more construction of enclosed offices within the space. And that drives up the cost of the turnkeys or allowances and so on. So if that trend maintains itself, we're going to see that it's going to be more expensive on that front in order to satisfy the needs of new tenants.

18:20 However, when we look at where our vacancy lies, it's basically in Quebec City. And I'm not saying that in Quebec City it's less expensive to build, but I think that the requirements are probably less expensive. expensive to build it used to be not as expensive but now it is as expensive to build but the requirements are quite different where we're able to do transactions with a lesser amount of turnkey or allowances and so if we trend our costs generally and we will see that because of the increased activity that we have on the leasing front in Quebec City because As I mentioned previously, we saw that we had an increase in occupancy in Quebec City.

19:05 I think we were at 86. I'm going from memory. I think we were at 86. Now we're close to 88% occupancy, and our target is eventually to go back to 92%. In Quebec City, I think 92% is sort of 100%. It's never 100%. So we still have a 4% increase to see, and that's where the capital expenses are going to occur. So if we look at, and I don't have offhand what the number of square feet that it equates, because in the office segment it's probably roughly 700,000 square feet, 4% of 700,000. So we're talking about 28,000, let's say 30,000 square feet, that's $30. We're talking about $900,000 offhand if we're successful to get to 92% occupancy.

19:57 Okay, that's very helpful. Just turning to the balance sheet and liquidity, you've done some dispositions, balance sheet's in a bit better shape, but you have the converts maturing end of this year, and your bank indebtedness went up a little bit, but your mortgages came down. I'm just trying to understand, do you need to dispose of more assets this year to get to a point where you can pay those down in cash? And is that the ultimate goal? Or are you looking to replace that with another piece of unsecured financing at some point?

20:40 I think that you've basically outlined all possibilities that we have that are available to us. And so, you know, I've often stated that our goal is not was not to redeem a debenture by issuing a new debenture for $24 million. Our business plan was to redeem the debenture by raising equity or whatever other functions that were available to us. However, in this market, we know that we can raise capital, but the cost of raising capital would be so high that it is prohibitive. So it might as well not think about raising capital through equity. We know that we can raise $24 million.

21:27 We had discussions with our syndicate, and we know that we can raise $24 million at an interest cost of I don't know yet, and we're praying for a lowering of interest rates by the central bank that will help us. But the challenge here is that Yes, we could have. We have properties on the market. We have properties that are in due diligence currently. And yes, there are going to be proceeds from these sales. And so this is one avenue. But we can't count on the timing. And that's what's unfortunate in the real estate business. is that you can't count on the timing of a disposition because everything could line up perfectly or couldn't. And so we have to think of a plan B as well. So it could be part of proceeds from dispositions.

22:21 It could be a partial raise of capital in the form of debentures because I personally wouldn't want to raise $24 million in the debenture because we're stuck with it for five years. And I would prefer to, if we go that avenue, to try to raise a lesser amount and see how we could time transactions in order to pay for the difference. But as you know, Matt, with a syndicate and raising debentures, there's sort of a minimum amount that we can raise as far as debentures is concerned in order to satisfy debenture holders or future debenture holders. So overall, that's the quandary that we have right now. That's the environment in which we're operating. And it is something that we have to look closely soon.

23:10 And probably by the time that we're going to have our Q2 call, we will have made a decision on that front.

23:22 And I remember, and I can't remember the exact time, but there's a component of residential density that you were hoping to monetize. That wouldn't necessarily come in in advance of the convert, right?

23:34 Well, as you know, we're counting on municipalities in order to advance the files as fast as they can. And that could be an oxymoron right there. But we're pushing hard in order to get these things done. and it's unfortunate but now we're dealing with the the politics of it meaning that you know the municipalities have done their work uh they're moving at the pace that they said that they would move so i can't fault them by saying it's not rapid enough because that's what they basically it is not self-imposed i think it's uh it's a function of government as to when you change zoning And so it is definitely happening, but a lot slower than anticipated.

24:26 And last one for me, and I understand that you're in transition on the CFO side, so I don't know if you'll have this available. The interest income, and I know there's hedging and receivable in there, was up quarter over quarter. I'm just wondering if that's kind of a new sustainable rate we should use for each quarter for the year, if there was anything one time or temporary in nature in there?

24:53 Well, I would average it out over this quarter and the previous quarter. So there's a mix. 50% would be swap related. The other 50% is the finance lease receivable that we have. So one of our tenants elected an option to purchase the building in two and a half years. So IFRS-wise, that becomes finance revenue right now. So I would do a mix. So there's 150% that would be a fix because it's based off of that finance income right there. And the other one is swap. So right now, well, ultimately the curve is a bit less downtrend than what we expected in Q4, right? It's a bit more stabilized and might not go aggressively as low as we would have thought. So of course, that's where swaps are kicking in and helping us out a bit more in Q1 right now versus Q4.

25:42 What would be the effective interest rate that those swaps are kind of trying to get you to on the portion?

25:50 So it would be a blind. It's about 4.4%. Okay.

25:54 That's very helpful. I appreciate it. And congrats on a good operations quarter. Thanks, Matt. Pardon me. This is the conference operator again. If analysts would like to ask a question, please press the star and the number one. Your next question comes from Sumaya Saeed from CIBC. Please go ahead.

26:18 Thanks. Good morning. Good morning. Firstly, on the office leases you have rolling for 2024, what are your expectations in terms of what kind of spreads you can see there and would they be similar in the high single-digit range?

26:38 I think that the trend is going to maintain itself, yes.

26:43 So single-digit?

26:44 High single-digit for renewals.

26:48 Okay. And any known vacancies that you're aware of in the portfolio?

26:55 We have a tenant that has put itself on the market, meaning the business for sale. So we don't know where this is going to land. It's an industrial lease for 132,000 square feet, where the tenant is currently paying less than $8 a square foot. And we received an opinion of market by CBRE. that we could release the property from between $14 to $16 net. So it would be very sad to lose a tenant through this process. However, on a longer-term basis, it would be very beneficial to BTB.

27:41 Okay, thank you for that. I just wanted to touch on, I guess, given the somewhat recent headlines and update with the federal budget, Let me just remind us of your exposure to government tenancy and what they've been doing recently and any changes in your portfolio.

27:58 The main tenancy that we have, or the largest tenancy, is in Ottawa, and they are both on Walkley Road. They are not in downtown Ottawa, and I'm sure you're referring to the fact that the federal government has indicated that they would want to leave downtown Ottawa. So both of these properties are not downtown Ottawa, one of which is the lease ends in seven years, and the other one, the lease ends next year. So... 26, sorry, in 2026. So... It's a little bit too early to call in order to figure out where their strategies are because usually the federal government starts a negotiation process 12 months hence. So as a result, we don't know.

28:54 But what we know, what's happening in that property per se, it is a property that's occupied entirely by non-resident taxation, which is a business unit that is completely different than others. So We think that there is going to be a renewal. We have another lease with the federal government in Gatineau, which is smaller, and that lease ends next year. And we are in renewal discussions with the government, and it seems that they are going to renew for three years. The other large one is, as Stephanie mentioned earlier, is in Quebec City. where the government went to the market in order to find or request for proposals in order to lease 15,000 square feet on a 15-year term. And it is one of our tenants, so they're already a tenant at 825 Le Bourneuf. And we won the bid, so we are negotiating the lease. for a 15-year term, fixed, no options to cancel, and that has a, I won't call it a substantial expansion component, but a good expansion component where we're going to have to move tenants around in that property in order to accommodate the federal government.

30:18 So that's what's ongoing with the federal government.

30:23 Okay, that was helpful. And then just lastly on the debt maturities for the year, it looks like you do have commitment letters for a portion and just curious, what rates are you seeing on the refinancing accomplished to date?

30:38 So I'm seeing a spread of around 1.5 to 2% depending on the properties. So industrial would go more towards a 1.5% versus what's in place right now. And office and retail would be more towards the 2%. Keep in mind that there's, yes, there is 113.4 mil coming up. However, most of that, I would say around 50 to 60 million is coming up in October. And it's mostly, well, 100% industrial properties. So we're looking for a more advantage spread for those properties and it's coming up more in q3 q4 okay uh thanks everybody turn it back thank you thanks at this time there are no further questions please go ahead mr lonar

31:28 Well, thank you very much for attending this morning. As you could see, our quarter is really about leasing, leasing efforts. And we are, as we mentioned during our conference call at Q4, that we were putting all our efforts on the leasing front in order to better our position. And that's what we are basically doing. And we've been doing so since the beginning of times, but also a big effort in 2023 in order to get us to where we are. And we are continuing these efforts because we want to see our occupancy rate within the suburban office environment to increase. And I mentioned earlier, 88% in Quebec City, that is something that we have to increase. And our target is to get to 92%.

32:14 And as you probably can surmise, to get to 92% is a tall order, but at the same time is something that we have to achieve in order to better our position in Quebec City. So thank you very much for participating again this morning, and we'll speak to you at the next conference for Q2. Thank you very much. This concludes today's conference call. You may now disconnect. Thank you.