Earnings call: BTB REIT maintains growth amid market shifts

BTB Investment Trust (BTB REIT) has presented its third-quarter 2024 results, focusing on a strategic shift toward industrial assets and the maintenance of a conservative debt structure. The Trust has increased its industrial asset holdings to 36.6% and reduced suburban office holdings to 42%. Despite a dip in occupancy rates, BTB REIT reported an increase in rental revenue and net operating income, along with a successful repayment of its convertible debenture, reinforcing its financial stability.

Key Takeaways

• BTB REIT’s industrial asset focus has grown to 36.6% of its portfolio.
• Suburban office holdings have decreased to 42%.
• New lease activity for Q3 was approximately 65,000 square feet.
• Occupancy rate fell to 92.3% due to Nuera Air’s bankruptcy.
• Rental revenue and net operating income rose by 3.9% and 3.8%, respectively.
• Adjusted funds from operations (FFO) per unit increased to $0.107.
• Distribution remained at $0.30 per unit, with a 77% adjusted payout ratio.
• No acquisitions or dispositions occurred in Q3.
• Three office properties are on the market, expected to yield net proceeds of $30 million to $40 million.
• Densification projects may allow for 600 to 928 new units, with construction potentially starting in 2026.

Company Outlook

• BTB REIT is prioritizing investments in industrial properties and necessity-based retail sectors.
• The Trust is seeking city approval for densification projects that could lead to significant construction in 2026.

Bearish Highlights

• The bankruptcy of Nuera Air left a 132,000 square foot property vacant.
• Retail occupancy decreased from 97% to 94.7%, potentially due to recent bankruptcies.

Bullish Highlights

• The Trust’s strategy led to a net gain of $0.3 million from external appraisals.
• The repayment of Series J convertible debentures optimizes the company’s mortgage debt.
• Liquidity remains strong with approximately $33 million available, including cash and credit facilities.

Misses

• No significant acquisitions or dispositions were made during the quarter.

Q&A Highlights

• Michel Léonard discussed rental market positioning and the challenges with a newly acquired property.
• Significant debt maturities are due in 2026, but the debt is well-balanced across the Trust’s 75 properties.
• The Trust reported strong leasing activity, with nearly 720,000 square feet leased since the beginning of the year.

Overall, BTB Real Estate Investment Trust (ticker: BTB.UN) is navigating the market by actively managing its portfolio composition, focusing on industrial and necessity-based retail investments, and maintaining financial discipline. The company’s strategic decisions, including the repayment of debentures and the potential for future densification projects, position it for continued growth. Market watchers will be looking forward to the Q4 2024 earnings update for further insights into the Trust’s performance and strategic direction.

Full transcript – None (BTBIF) Q3 2024:

Operator: Good morning. My name is Eric, 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 Third Quarter Results Conference Call for which management will discuss the quarter ended September 30, 2024. All lines have been placed on 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.btbreit.com/investors/presentations/quarterlymeetingpresentation [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 statements 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, uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust’s management discussion and analysis and in its annual information form, which were filed on SEDAR+ and on BTB’s Web site at www.btbreit.com/investors/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, accompanied today by Mr. Marc-Andre Lefebvre, Vice President and Chief Financial Officer; and Ms. Stephanie Leonard, Senior Director of Leasing. Mr. Leonard, you may begin the conference.

Michel Léonard: Thank you, Eric. Good morning, all. It’s a pleasure to report our Q3 results for the year 2024 — back 20 years. Our investment activity is — we’re still focused on industrial assets and we’ll go through some numbers on that front, still involved in the densification of some of our properties. On one, we understand that the city in question is voting on a zoning change on November 14th. So during the next quarter, we’ll have more visibility on that. We are actively working on the construction of the Winners store in Lévis next to — or across the river from Quebec City. And so it is a densification opportunity that is ongoing. The construction is very well advanced where we think that we are going to deliver the property for Winners Fittings in January of next year. We did dispose of two suburban office properties earlier this year. We have two suburban office properties under contract currently. And so we’re just waiting for the results of due diligence on those fronts. If we go — if we look at the progression of our portfolio in 2021, we were almost 20% industrial whereas now we’re at 36.6%. We have a decrease in our holding of the suburban office segment from 2021 at almost 54% down now to 42%. And as far as necessity based retail, in ’21, we were at 27% and in ’24, we’re almost at 22%. As far as the geographical diversification, nothing has really changed on that front. As far as — I’m turning to the page called development opportunity, if you are looking at the presentation on the Web site. So we have excess land in Ottawa and the city is actively working on transitioning our zoning from a TUD to a HUB, meaning a higher density as a result of the fact that there’s an LRT station being built just across from our property. We understand that the zoning is going to be implemented by the city. The key metrics, I’m turning to the page of key metrics. So 6.1 million square feet,f air value of our investment property at $1.2 billion. The activity for the quarter as far as new leases were at almost 65,000 square feet and the total lease renewals for the quarter were at 255,000 square feet, an impressive number, which is year-to-date, the total leasing activity is 719,000 square feet. Our occupancy rate is down at 92.3% as a result of the previously announced bankruptcy of Nuera Air in one of our industrial properties located in Laval. It’s 132,000 square feet. So this property is currently vacant. The trustee in bankruptcy has vacated the premises, left the premises in a dire need of a good cleaning and also of disposing of the remaining assets. So we’ve mandated a company in order to do so. So they proceeded to do an auction. And we don’t know what the result of the auction was as far as the monetary amount of money that’s gleaned from the auction, but the premises right now are in the better shape than they were in July when the tenant basically left the premises. So as a result of this, we did put this property on the market through CBRE (NYSE:), which is the dominant player in the industrial landscape on the island of Laval. And as a result of the fact that now the property is better — in a better state of cleanliness, now we understand that we’ll be in a better position in order to lease that property. So with this, I’d like to turn the presentation to Stephanie to talk about our leasing and renewal activity.

Stephanie Leonard: Thank you, Michel. So as a reminder for all of you following us on our online presentation, we’re currently at Page 8 of our presentation. For the third quarter, our new lease activity totaled 64,583 square feet, of which 45,870 square feet belong to a long term lease signed with Winners/Homesense in Lévis, Quebec, as Michele mentioned. Another 18,713 square feet of new leases were signed with new tenants across our portfolio. Notably, a 5,000 square feet approximately suburban office transaction brought our Ottawa portfolio to a 99.4% occupancy rate, which is a historical high for that sector. For the cumulative nine month period, our new lease activity totaled roughly 162,000 square feet, of which 60.1% were concluded in our suburban office segment, 38.6% were concluded in our necessity based retail segment and 1.3% in our industrial segment. For the third quarter, we renewed 58.4% of leases coming to maturity with another 9,900 square feet awaiting execution. For the nine month cumulative period, we renewed 75.3% of our leases coming to maturity. As we proactively ensure communication with our clients and seize opportunities to conclude early renewals, during the quarter, we renewed 207,000 square feet — roughly 207,000 square feet with clients whose term expire in 2025 and thereafter. In terms of some noteworthy transactions, we signed a lease extension with Lowe Martin Group in Ottawa in our industrial segment for 116,000 square feet, 44,000 square feet with the Government of Canada in Gatineau and a 36,000 square feet renewal with Hydro-Quebec in Trois-Rivieres. It’s to note that our average increase in our lease renewal rates for the quarter, specifically in our suburban office segment, showed a 0.2% decrease mainly due to our Hydro-Quebec renewal, which was an as is where is renewal, meaning no lease incentives were granted. In terms of our industrial segment, we saw a 5.8% increase and our retail segment a 6.7% increase. Overall, we noted a 4.6% increase in our average lease renewal rate since the beginning of the year and our weighted average lease term stood at 5.7 years. In total, our leasing — our total leasing activity for the quarter totaled 319,495 square feet, which brought our occupancy rate to 92.3%, a 1.4% decrease versus Q3 2023 due to the aforementioned Nuera Air bankruptcy. In terms of our presentation, if you flip to Page 10, you’ll find a snapshot of our first ever development in Lévis, Quebec, as we’ve previously mentioned in our — throughout the second quarter as well. As Michel mentioned as well, the delivery is planned in January 2025 and the pad construction is about 45,000 square feet signed with Winners and Homesense. On Page 11, you’ll see the snapshot of the opportunity that Michel had mentioned in Laval, so our property located at 3695 des Laurentides currently for lease with CBRE. On that note, I’ll hand it over to Marc-Andre for the financial review.

Marc-Andre Lefebvre: Thank you, Stephanie. Good morning, everyone. Let’s review the financial section starting on Page 13. So the financial results for the third quarter reflect the good performance of our operations, our ability to generate organic growth and the sound management of our liquidity profile through targeted mortgage top-ups. This positive performance was partially mitigated by the bankruptcy of two tenants. Rental revenue for the quarter increased by 3.9% compared to the same period last year. This increase is related to several items, namely acquisitions made in 2023, operating improvements, higher lease renewal rates and embedded increases in lease rates for in-place leases. Net operating income increased by 3.8% compared to the same quarter last year. The increase in NOI is directly related to the increase in rental revenue. However, this increase was offset partially by the bankruptcies, as I mentioned, of two tenants. The first one is Energie Cardio for $0.3 million and the second one is Nuera Air, as we previously mentioned, and the amount is for $0.5 million. Looking at same property NOI, which is a metric — a good measure of our organic growth, it increased by 7.3% for the quarter compared to the same period last year. This increase is due to higher rent renewal rates across all three segments of the portfolio. FFO adjusted per unit was $0.107 for the quarter, an increase of $0.03 from the same quarter last year. The increase is mainly explained by higher NOI, which was partially offset by an increase in net interest expenses. Note that the weighted average number of units outstanding increased by 1.4 million units and this is due to the participation of some of our unitholders into our distribution reinvestment plan. In terms of distribution paid to unitholders, we maintain our distribution at an annualized rate of $0.30 per unit. The AFFO adjusted payout ratio was slightly over 77% for the quarter, a 3% decrease from the second quarter of this year. Now looking at the value of our investment properties, it stood at over $1.2 billion at the end of the quarter, a slight increase from the previous quarter. As of September 30, 2024, BTB had 52% of its entire portfolio externally appraised. The exercise resulted in a net gain of $0.3 million for the cumulative nine month period. Note that we did not make any portfolio wide changes to our cap rates this quarter and so far this year. As of the third quarter, the average cap rate for the industrial portfolio was 6.1%. For the suburban office portfolio, it was 7%. And for the necessity based retail, it stood at 7.1%, resulting in a weighted average cap rate for the entire portfolio of 6.7%. In terms of portfolio allocation by asset class, 36.6% of the value of our investment properties come from our industrial segment. As Michel previously mentioned in his opening remarks, in line with our strategic plan, we are constantly looking to reduce our office allocation and recycle the capital into industrial property. There were no acquisitions nor dispositions during the quarter. Looking at the capital structure, we concluded the quarter with a total debt ratio of 58.3% and a mortgage debt ratio of 52.5%, which is relatively stable versus the prior quarter and also versus the same period last year. The weighted average term on our debt is three years,t hat excludes the credit line and it’s a slight decrease of 0.1 year from the last quarter, so pretty much in line. The weighted average interest on our mortgage debt was 4.33% and that’s a decrease of 24 basis points from the last quarter. Regarding our refinancing commitments until year end, we have less than $9 million of mortgages coming to maturity and we currently have indicative offers from lenders for the entire amount. Our debt ladder remains conservatively structured, reducing interest rate risk. Now with the Bank of Canada firming up its rate cutting cycle, this points to a better rate environment for future mortgage refinancing. With regards to the maturity of the convertible debenture Series J — G, we are pleased to report that we have repaid the entire principal amount of debentures on October 31st. So by optimizing mortgage debt on some of our properties, we generated proceeds and repaid the convertible debenture. We also achieved a weighted average rate cost that was significantly below the cost we would have incurred by issuing a new convertible debenture. This is a testament to our efforts to reduce the interest cost on our debt. Finally, we held close to $3.3 million in cash at the end of the quarter and approximately $29.3 million is available under our two credit facilities for a total liquidity of almost $33 million. This completes our presentation. And with that, we will be pleased to take your questions. Operator, can we please have the first question on the line?

Operator: [Operator Instructions] Your first question comes from the line of Matt Kornack with National Bank Financial.

Matt Kornack: Just quickly on the balance sheet and the post quarter repayment of the convertible debenture. Can you — first off, it sounds like you’ve got a few property sales that are underway, so could you give us a sense of the quantum there and then just maybe other sales that you’d be anticipating on that front? And maybe as well, what you think you could get from mortgage up financing at this point to glean some excess capital there?

Marc-Andre Lefebvre: So in terms of our disposition program, we have three office properties on the market right now. During our last call, we mentioned that we — the gross proceeds would — were ranging between $50 million to $60 million. Net of mortgages, it’s $30 million to $40 million. So that’s what we’re working on right now in terms of disposition. Looking at additional mortgage top-ups, I mean, we’re constantly reviewing the portfolio, making sure we’re optimizing properties, especially properties that have increased in value significantly. Bear in mind that we’re also keeping — we’re also — we also had the objective of maintaining our leverage, our total leverage below 60%. So we always keep that in mind when we’re doing top-ups. And yes, we were able to get the full amount or almost the full $24 million in mortgage top-ups to repay the convertible debenture.

Matt Kornack: And then just on the leasing side, if you could give us an update. I think you touched on the industrial vacancy, but any sense of the timing there. But then also Energie Cardio, I think you’ve re-leased that space. Can you give us a sense of the timing and the NOI on that? And then also for the Winners lease, January 2025 for 45,000 square feet. What would be the NOI contribution? And will that be when cash rent commences or will it be subsequent and there will be a kind of free rent or a straight line rent period at the front end of that?

Stephanie Leonard: So in terms of Energie Cardio, Energie Cardio declared bankruptcy, I believe it was in Q2, it was in our Q2 report. We’ve successfully re-leased that space and cash flow has commenced, I believe, to the — I’m positive in Q1 –. In Q1 2025, cash flow will commence. There was some free rent period. So free rent period for Energie Cardio, but it is committed in place. In terms of Winners, so occupancy is January 2025, they will be opening their doors in March 2025. And we — there’s no free rent period in terms of — only free rent period is between January and March. So rent will start in March 2025.

Charles Dorais Bédard: And full year NOI will be about $1 million.

Matt Kornack: $1 million?

Charles Dorais Bedard: Yes.

Matt Kornack: And then maybe just a broader kind of question around capital allocation and where the portfolio goes from here. Industrial has been the focus and we fully expect industrial after a period of maybe a little bit of softness will rebound and be very strong again. But necessity based retail has kind of taken on the mantle of the place that everybody wants to be. So how should we think about that concentration in your portfolio going forward? And is there a sense that you need to de-diversify and be just industrial or does necessity-based retail have kind of a bigger component in the future of BTB as well?

Michel Léonard: Matt, we don’t intend to dispose of our grocery anchored retail properties for now. I think that it is a segment that is really interesting to be in these days. And not only that but there’s value to be gleaned from these properties as far as densification. So as a result of it, and we can’t do everything at once. So we have two larger projects on the densification and we’re concentrating on that for now. But we’ve basically shown that attracting Winners in our center in Lévis started by redefining the shopping center where we were able to attract, for instance, Sephora, BBW. Now we’re in conversation and almost signed a lease with a national retailer of great notoriety within the market. So there’s a lot of room right now for these properties in order to basically take a new presence within these markets. So it would be very difficult for us to part with certain properties, retail properties where the value that we would glean from a sale would not be the real value, because if these properties have a development play then I think that we are a good actor in order to seize the opportunity on that front. So when we talk about disposition, we only talk about dispositions for our suburban office properties. And the one in Quebec City is a property that is occupied at 50%. Next (LON:) year is going to be occupied at 40%. So we’re very pleased to be able to dispose of this one as far as it definitely helps the portfolio and it’s going to help NOI. So that’s basically where we’re at where we don’t — we may have to dispose of a retail property but it’s not part of our plan. It would be something that would be an opportunity, a market opportunity other than a decision that we would have made on that front.

Matt Kornack: And then just quickly going back to the density value. It sounds like the project nature has changed, at least on one of the sites and that you could potentially get more density. Can you give us a sense — I know we’ve talked about this in the past and obviously there’s sensitivities, but as to when and how you’d either build those out or monetize the residential density component?

Michel Léonard: So if we — what we understand from the city and what we understand the city is going to vote on on the 14th is to add density to our site of a minimum of 200 doors per acre and that would mean basically 600 and some doors that could be built on the site, but they say it’s a minimum. So we would be pushing for 250 or 260 doors per acre. And that would basically give us the total units that we wanted in the first place, which we always talked about 928, just shy of 1,000 doors. And so that’s our objective. I think that the project would be seemingly viable at 600 doors but it would definitely be better to add another 300 doors just for the site itself. So as far as timing is concerned, if let’s say that the city votes on what I’ve just described because there’s no reasonable certainty on what they’re going to vote on. And so if it is then at this point there’s going to be — the presentation to citizens of our project and so on in the early 2025 and probably go ahead from the city by June of 2025. If that’s the case, then the first phase would start in 2026. It would be roughly 18 months for construction of the first phase, then second phase would start after that. And we’re talking about five phases and the first two phases are the largest of all the phases. And we’re talking roughly close to 450 units in the first two phases. So it’s almost half the project. So that’s what we’re hopeful. And if you’re talking about payment, so payment for densification. So the payment from densification occurs at the exercise of — it’s not — for the first two phases, it’s not an option, it’s like the minute that they exercise, they exercise. But the minute that they put the shovel in the ground for each phase, as a result of that, then there’s a payment for densification.

Matt Kornack: So this is a prearranged agreement with a partner that is going to compensate you for the project, is that fair?

Michel Léonard: Correct, exactly.

Operator: Your next question comes from the line of Sumayya Syed with CIBC (TSX:).

Sumayya Syed: I wanted to follow up on the industrial vacancy and wondering about the prospects for re-leasing there and what you’re seeing on the rent side. I think last time you mentioned being in the market at around $14.50?

Michel Léonard: Yes. We’re in the market at around $15. And as I mentioned, we are expecting around $12 or $13 net.

Sumayya Syed: And then any sense of timing on that based on interest you’ve gotten so far?

Michel Léonard: Sumayya, the problem that we’ve had so far is the fact that the premises were left in such a dire need of a broom that it was — it’s nearly impossible to show the building. It’s really difficult to describe but let me try. When we first got into the building, it’s as if on the Friday before, the employees didn’t know that on the Monday (NASDAQ:) morning they would go — the business would go bankrupt, because everything was left on the desks everywhere, paper everywhere as if it was a ghost town. And so we had to find somebody that could help us clean, recycle all the papers that were left and try to sell everything that the trustee couldn’t sell. And so we gave — we signed a contract with Continental Auctioneers and they proceeded to basically make an inventory of what they had, then reached out in order to find bidders for the items that were left behind and then started the process of the auction, that took 1.5 months. Now we went to the building yesterday afternoon and it’s substantially cleaned up, however, it’s still not ready for tenants to visit. And that’s the sad part of it. It’s as a result of the way that it was left for us, it was basically — it was like these shows on TV that you see people that are hoarding where it was like that. It was terrible. So now we’re in a position where we can see the size of the building so that somebody that would visit would be basically able to basically position all their operation within the property, because before it was literally impossible to do so. So now we’re getting there. And I think that by — throughout the month of November, we’ve decided that we were going to do a few improvements to the building in order for it to show better. Literally, we have to — they use what they call a Zamboni, it has nothing to do with hockey or ice. But in order to clean, we have to power wash the walls, we have to power wash the structure. So there’s still things that we have to do in order to make it clean so that it shows well. And that’s a hindrance and it’s not fun and it’s not necessarily acceptable but this is something that we have to deal with and we’re going to make it right.

Sumayya Syed: We’ll stay tuned for an update there. And then the other question I had was on the occupancy side. I was noting on the retail, the committed was stable from Q2 but that the in-place moved from 97% to 94.7%. Was that tied to one of the bankruptcies or something else going on here?

Stephanie Leonard: I have to get back to you on that. I could — I’ll look at our files and I can get back to you via e-mail to answer your question more in depth. I don’t have the information in front of me right now.

Sumayya Syed: And then just the last question I had was looking at your debt maturities, you do have a significant roll coming in 2026. Is that skewed to any particular asset type or is it kind of well balanced out? And then just wondering where you are in terms of discussions on the 2026 maturities?

Marc-Andre Lefebvre: 2025 or 2026, Sumayya?

Sumayya Syed: 2026 where you have almost a quarter of your debt rolling.

Marc-Andre Lefebvre: There’s nothing that’s really specific. It’s just the way the debt is staggered,there’s nothing chunky in there more than anything else. As you know, we have 75 properties, so it’s — I’d say it’s just — it is what it is.

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

Michel Léonard: Thank you. Thank you very much for joining us this morning. I think that the big event of the quarter is an event that occurred after the quarter, which is the repayment at maturity of the debentures. It was a great way for us to get — but to get rid of the debentures and it’s something that we always mentioned that we didn’t want to issue new debentures within our portfolio. If we had to we had to but if we didn’t have to then we didn’t have to. And we found the opportunity in order to redeem those debentures for $24 million plus accrued interest. So it’s otherwise generally a boring quarter, if I can say this, and all our metrics are trending positively, except for the unresolved issue of the industrial property where we are going to resolve this issue. So we look at our lease renewals, we look at our leasing velocity and everything is trending positively. And as I mentioned, almost 720,000 square feet of activity on the leasing front since the beginning of the year. It’s incredibly active in the sense that we’re able to do, close on our renewals, increase rents, still increase rents and lease our properties. So it is a positive and we’re quite proud of these results. And as a result, thank you very much for participating in our call this morning and we’ll see you for the results of — not see you, we’ll hear from you for the results of the Q4 2024 in the new year. Thank you very much.

Operator: This concludes today’s conference call. You may now disconnect.

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