Good morning. My name is Joelle, 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 second quarter results conference call, for which management will discuss the quarter ended June 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 the BTB's website at www.btbreit.com/investors/presentations/quarterlymeetingpresentation. After the speaker's remarks, there will be a question-and-answer period reserved exclusively for analysts. If you would like to ask a question during this time, please press star followed by the number one on your keypad. 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 risk, risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecast 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 Management's discussion and analysis, and in its annual information form, which were filed on SEDAR+ and on BTB's website 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 by Mr.
Marc-André Lefebvre, Vice President and Chief Financial Officer, and Miss Stéphanie Léonard, Senior Director of Leasing. Mr. Léonard, you may begin your conference.
Thank you, Joelle. We're also here in our boardroom with Charles Dorais-Bédard.
Bédard.
Charles Dorais-Bédard, sorry, who is in charge of all the financial disclosures. The portfolio at a glance, we still are at 6.1 million sq ft, 75 properties that we own for a fair value of a little bit more than CAD 1.2 billion. And I remind everybody that 75% of our properties were externally appraised at the end of 2023. The investment activity is still focused and obviously focused on industrial assets. We have disposed, at the beginning of the year, of two suburban office properties for a little bit more than CAD 6 million. We have three office properties on the market today.
We've received two offers on two of the three office properties, and the other one is in due diligence. All three of them are in due diligence. We're still actively involved in our densification opportunities on our sites, and I'll go through it really quickly. The real estate portfolio, its composition is basically we're at 36.6% of industrial assets, up from a few years ago, at 19.5%. Our suburban office weight is diminished from 53.7% to 42.7%, and our necessary base retail has gone also down from 26%, or almost 27% to 21%.
The geographic diversification of our portfolio still reports that 20% of office, of our properties, located in Quebec City, 54% in Montreal, 2.4% in Three Rivers, 13% in Ottawa, 4% in Saskatoon, and, almost 7% in Edmonton. Regarding our development opportunities, we are pleased to report that we have signed our lease with Winners, for our property located, called the Méga Centre Rive-Sud in Lévis, Quebec. So this is, the construction of a 43,000 sq ft pad. Again, two Winners. The construction period is between 12-18 months. Obviously, the lease has been signed, the construction has begun, and, the footings have been poured, the steel deck, the steel has been installed, as well as the roof deck.
So the expected delivery to the tenant will be around February 2025, with the lease commencement in Q2 2025. So we're if we're looking at construction cost versus appraised initial appraised value of the property, we're looking at a lift on our total valuation of our properties. The other site is at 2611 Queensview Drive, where the city of Ottawa is working steadfast on changing the zoning. The current zoning is for office on our site, for a maximum of four stories, and we're expecting the site to be rezoned to a 24-story residential possibility. Also, the other opportunity that we do have is we...
On the island of Montreal, the property, we're focused on changing the zoning with the city, and we understand that the vote is going to take place in September 2025 by the city in order to approve the new zoning requirements on our site, and we understand that the densification for residential is going to be permitted on our site. So the key highlights, again, 6.1 million sq ft, fair value of our investment property, CAD 1.2 billion. The leasing activity, the total leasing activity for the quarter was 256,000 sq ft, and a record committed occupancy rate of 94.6%. With this, I'd like Stéphanie to take you through our leasing and lease renewal activity.
Thank you, Michel, and good morning, everyone. Just a reminder that if you're following us on our slide deck, that's available on our website. We're currently on page nine of our presentation. Throughout the quarter, we managed to lease and renew approximately 257,000 sq ft across our portfolio, of which 217,000 sq ft were lease renewals and 40,000 sq ft were new transactions. Out of our new transactions, our suburban office segment continues to show velocity, as 88% of our cumulative leasing activity comes from this segment. In terms of our new leases completed this quarter, in terms of some noteworthy transactions, we concluded a 14,500 sq ft, again, just rounding up with Énergie Cardio in Quebec City.
As a reminder, we had a previous Énergie Cardio banner that went bankrupt, and we now successfully released this, the vacant space to a new operator. 3,450 sq ft with MNP in Trois-Rivières. Important to note that this also consisted in an anticipated lease renewal. With this expansion of 3,450 sq ft, MNP now has a total footprint of 23,000 sq ft within our property in Trois-Rivières. In terms of another transaction, more on the retail side, we leased 3,200 sq ft in Saint-Lazare. So Saint-Lazare, our property in Saint-Lazare, which has been part of our portfolio for quite some time now, and we're happy to report that this transaction brought our occupancy rate of the property to 100%.
So our suburban office properties in the Quebec City market continue to show their strategic positioning, apologies, as 87% of our new leases signed during the quarter were concluded within that segment, and that's including our property in Trois-Rivières as well. In terms of our lease renewals for the quarter, out of the 217,000 sq ft signed, 158,000 were with tenants whose leases expired during the quarter, and 58,000 were renewed in anticipation of the tenant's maturity. We achieved an average increase in the lease renewal rate of 5.7% for the quarter. And in terms of the breakdown per asset segment, a 6.8% increase for our suburban office segment, 5.2% for our necessity-based retail, and 5.7% for our industrial segment.
The overall increase for the cumulative six-month period, so Q1 and Q2, was 6.6% for our lease renewal rate. Our top three noteworthy renewals for this quarter were concluded with Sobeys, so our IGA, located in the West Island for 45,000 sq ft, Continental Capital in Saint Bruno for 30,000 sq ft, that's a retail site, as well as AMA Property Management Group in Edmonton for 25,000 sq ft. Pages 11-13 of our slide deck provide a little bit more color in terms of the new leases as well as our renewals for the quarter. All in all, our leasing activity brought us to a 94.6% occupancy rate for the quarter, as Michel mentioned, an all-time high for BTB.
As a subsequent event to the quarter, we were notified of the bankruptcy of a tenant occupying our property located on de la Rampaide in Laval, which is strategically located along Highway 15. We therefore have a new leasing opportunity of roughly 133,000 sq ft in our industrial segment that is available today. We already have actively started marketing this opportunity, which has tremendous potential and, I mean, it has, it has great potential, great visibility along Highway 15, so this is a new opportunity for us within our portfolio. So with this, I'm going to turn it over to Marc-André for the financial review.
Thank you, Stephanie, and good morning, everyone. The financial results for the second quarter reflect the resilience of our industrial segment, the continued leasing velocity in our office and retail segments, and our ability to manage the rise of interest expenses. The portfolio allocation by asset class continues to evolve in line with our strategic plan, with now more than 36.6% of the investment property value coming from the industrial segment, an increase of 2.3% compared to the same quarter last year. We are constantly looking to reduce our office allocation and recycle capital in a organized fashion into our industrial segment. For the three months ended June 30, 2024, adjusted FFO per unit was CAD 0.104, a decrease of CAD 0.014 from the same quarter last year.
The decrease is explained by a NOI reduction of CAD 0.2 million, an increase in net interest expenses of CAD 0.3 million, and an increase in administrative expenses of CAD 0.8 million. Also, please note that the weighted average number of units outstanding increased by CAD 1.5 million, and that's due to the unit holders' participation in our distribution reinvestment plan. Looking at rental revenue for the quarter, they increased by 1.6% compared to the same period last year. This is mainly due to higher average lease renewal rates and also improved occupancy rate. Net operating income decreased by 0.5% compared to the same quarter last year.
The decrease in NOI is partially related to the bankruptcy of Énergie Cardio, a tenant in Quebec City, and that impacted NOI by CAD 0.2 million. The vacant space was rapidly leased to a group who purchased the assets of the bankrupt business. Same property NOI increased by 1.4% for the quarter, compared to the same period last year. The increase in SPNOI is generally explained by an increase in rental rates for the industrial segment. Looking on a segment per segment basis, starting with industrial. For the quarter, the industrial segment, SPNOI, increased by 7.3% compared to the same period last year. This increase is due to an increase in recoverable capital expenditures and an increase in rental spreads for in-place leases. Now looking at necessity-based retail segments.
So again, for the quarter, the SPNOI for that segment, for retail, decreased by 0.8% compared to the same quarter last year. This decrease is due to lease inducements that were granted to tenants who concluded lease renewals during the quarter. Lastly, our suburban office segment. So finally, the SPNOI of that segment decreased by 0.9% for the quarter, compared to the same quarter last year. This decrease is mainly due to the previously mentioned bankruptcy of Énergie Cardio in Quebec City, and again, it caused a negative impact of CAD 0.2 million. As previously mentioned, our occupancy level, including committed leases, was 94.6% at the end of the quarter. This is an historical high for our business.
Shortly after the end of the quarter, Nuera Air, a tenant occupying approximately 133,000 sq ft in the industrial property located in Laval, declared bankruptcy. The effect of this bankruptcy is already impacting FFO during the quarter, through a provision in expected credit losses of CAD 0.3 million. And this, provision is recorded in administrative expenses. Now, looking at distribution paid to unit holders. We maintain our distribution at an annualized rate of CAD 0.30 per unit. The AFFO adjusted payout ratio was 80.2% for the quarter, and this is a decrease of 3.7% from the first quarter of 2024. The value of our investment properties was CAD 1.209 billion at the end of the quarter, a slight increase from the prior quarter.
Note that we did not make any portfolio-wide changes to our capitalization rates this quarter. There were no acquisitions nor dispositions in the quarter. Now, turning our focus on the capital structure. We concluded the quarter with a total debt ratio of 58.1%. That's a decrease of 20 basis points compared to the prior quarter. The weighted average term on our debt is 2.9 years. This is excluding the credit lines, and it's a slight decrease of 0.1 year from the last quarter. The weighted average interest on total debt was 4.84%, an increase of 11 basis points from the last quarter. 88.1% of our debt is at fixed interest rates, which was beneficial during the rising rate environment of the last couple of years.
Now, with the Bank of Canada entering a rate cutting cycle, this points to a positive rate environment for future mortgage refinancings. Our debt ladder remains conservatively structured. As an example, in 2025, there is CAD 84 million of debt to refinance, which represents only 12% of our total debt outstanding. Now, looking at refinancing commitments for the balance of the year, we have close to CAD 72 million of mortgages coming to maturity over the next six months, and we currently have commitment letters from lenders for approximately CAD 18 million, so that's 25% of the amount to refinance. With regards to the upcoming maturity of the convertible debenture series G, totaling CAD 24 million, we are currently exploring all refinancing alternatives. Finally, we are comfortable with our liquidity position.
We held close to CAD 1 million in cash at the end of the quarter, and also we have approximately CAD 18 million available under our two credit facilities. Note, there's also an option to increase the capacity by a further CAD 10 million. That's subject to creditor approval. I will now turn the presentation back to Michel for his closing remarks.
Sophie, sorry, Joelle, sorry. We're ready for questions.
This is the conference operator. At this time, I would like to remind everyone that the analysts may now ask their questions by pressing star, followed by the number one on your telephone keypad. Again, if you would like to ask a question, please press star and the number one. We will now pause for just a moment to compile the Q&A roster. Your first question comes from . Your line is now open.
Thanks. Hey, good morning, guys. Maybe just to-
Good morning.
Morning. Morning. Maybe just to start, Michel, you mentioned there earlier in your remarks, I think it was three office properties on the market there today. Just any thoughts as to how we should be thinking about potential proceeds on these?
I think that if you're looking at the total amount for the disposition, you're between CAD 50 million-CAD 60 million.
Okay. Okay, thank you. And then maybe just as a follow-up, there, you know, timing-wise on those, Marc-André, I know you mentioned kind of you're looking through any and all options for the convertible debenture. So just some thoughts there. Are you leaning one way or the other with respect to that potential maturity?
No, right now, all options are on the table. We're having proactive dialogue with our bankers. We understand the market is open for BTB if we wish to refinance the convertible with a new convertible. But we're also looking to add second tranches on existing mortgages, where we could potentially repay the convertible bond.
Got it. Okay, thanks. And maybe if I can just sneak one more in. Just with respect to the mortgage maturities over the second half, can you just give a sense as to spread or cost on those renewals?
Yeah. So the spread would be... Well, in Q3, we have about CAD 35 million coming due. The interest spread on two of the three, the three-year loans, would be around 100- 150 basis points. And same thing for, well, for Q4, it would be higher. So we have CAD 37 million coming to maturity that we need to refinance, and the spread would be 100 to around 150 to 200, and that's because we have a very low rate in place right now.
Got it. Okay. Thanks, guys, appreciate it. I'll, I'll turn it back.
Thank you, Tom.
Your next question comes from Matt Kornack with National Bank Financial. Your line is now open.
Good morning, guys.
Hi.
-With regard to the industrial bankruptcy, you mentioned CAD 300,000 in credit losses. If I annualize that, that would imply something like a CAD 9 in-place rent on the 132-
No, the-
1,000 sq ft.
No, the in-place rent was CAD 7, Matt.
Okay.
and we're looking to... Right now, as we have, you know, we've given an assignment or the mandate to lease the property to CBRE, who is a dominant broker in Laval, where this property is located. And the expectation of a lease rate is between CAD 11-CAD 13 net for the property. So on one side, obviously bad news. You know, when we received the news, we weren't too thrilled about it. But, if we're successful or when we'll be successful to re-lease the property, then we're gonna have a lift, not only in the rental rate, but possibly also in the value of the property.
Is it generic space, Michel, that, like, there's nothing-
It's, uh-
Specialized in it?
It's the height is variable. So we've got a part of the property with 28 ft clear. We've got decent office, and there's a portion of the building that is, was built some time ago. So, the portion that was built some time ago is the traditional old style, industrial, kind of layout, and then it was added on as the years went by. So as you're moving from, let's say, the south of the property to the north of the property, you're going from old to brand new.
And would it logically make sense to go after a single tenant, or would you potentially demise it into-
It could be split. And so we're on the market with, let's say, a split in half or for a single tenant for 132,000 sq ft. The market in Laval is a healthy market. As you know, you know, in industrial, it's a little bit slower, so you don't. It takes more than two weeks to lease an industrial building these days. So, we know that we have some... We're gonna at least a minimum of three months to relet the property. Also, I have to say that... I don't know if you've ever suffered a or been walked through a property where a tenant has gone bankrupt-
Hmm
... But this was quite the news in the sense that it looked like a ghost town. I mean, they put their pencil down at five o'clock on whatever day it was, and the next day, they never came back to the office. So we've got to clean it up, like, substantially. And that's something that we've undertook already. So we're starting the cleanup process, but it's not fun. It's not something that is... It's really, really, really bizarre. And we didn't expect it because a month prior, they had paid the rent, so it was really for us, it was a huge surprise.
Fair enough. On the cost side, this year over year, it looked like OpEx was up a fair bit, and I think it was in repairs and maintenance. I'm not sure if there was anything to that and how we should think about margins. Then maybe also CapEx was a little higher this quarter. I don't know if it related to some of that redevelopment activity you were speaking to earlier in the call.
Not really. The redevelopment, or the development or the construction of the Winners is going to... Basically, when we had refinanced that property, this retail property, we had foreseen that there may have been a possibility to build on the excess land that we own. So there was a window that was open with our lender in order to increase the size of the loan to cover 80% of the cost of the construction. So as far as, call it capital costs or whatever, so we haven't yet undertaken any capital costs for that property. And any, let's say, the CAD 2 million that we anticipate coming out of our bank account, obviously, is gonna be capitalized in part of the value of the property. So the answer to this is, it's not there.
So I'll let Marc-André answer the other part of your question.
... Sorry, can you repeat the second part of the question?
You know what? It was just this quarter. CapEx was fairly elevated, as was repairs and maintenance costs. But to be fair, Q1 was very low, so I don't know if it was just an episodic thing. These can be lumpy, but I didn't know if there was anything specific in either of those numbers. The OpEx, in particular, looks. It's up.
There's nothing specific, yeah.
Okay.
I think it's more linear, and it has to do with, you know, when there's an increase in the occupancy rate, obviously, there's an increase in cost of doing business for these transactions. But then it flattens out. But over the course of the year, we don't anticipate an increase versus last year.
Okay, fair enough. Thanks, guys, appreciate it.
Your next question comes from Mark Rothschild with Canaccord. Your line is now open.
Thanks. Good morning, guys.
Good morning, Mark.
In regards to handling the debenture, it sounds like one of the options being considered, or maybe this will be part of the solution. Not the solution, but the way to deal with it, is levering up or taking additional debt on some existing properties. What is it that you would ideally like to do as far as taking your, you know, asset-level secured debt versus maybe a new debenture or funding with maybe some proceeds of asset sales?
Well, Mark, you and I have had a number of discussions on this, and I'm gonna hold the line of what I've always said. We don't want to renew a debenture. We want to find alternative solutions to the debentures, debenture. The debenture, we're stuck with it for four or five years, and as a result of being stuck with it, then, you know, we're always gonna talk about our leverage ratio for the next five years if we go that route. So, what we're attempting to do, as Marc-André described, is to up financing on some properties, and we're getting positive signals on that front. It's not done, and we understand that we could cover the cost of the CAD 24 million of the debenture that comes to maturity.
So, by up financing, it means that we would not undertake or have an increase in our debt ratio or stability on our debt ratio for five years. It would be for two, let's say, between two and three years. And that's the goal that I had set for ourselves way back when, when we issued the last debenture four years ago, and I and at that time, we were very reluctant in issuing the debenture, but as you know, the market wasn't there, so we had no choice. Now, we still don't have a choice, but we know that the syndicate is there in order to issue a debenture. We understand that, let's say, it would be around an 8% coupon, which is higher than the cost that we would suffer or incur by up financing on our properties.
Let's say that the cost, the blended cost of the refinancing, call it 4.25, 4.25%. So there's substantial difference in the interest cost that we have to cover also. So the debenture that comes to maturity is at 6%. We have to... And I don't wanna belabor anything, but when you issue a debenture, you have a, let's say, a 4% commission to pay. And when we go to the to refinance, we don't have these types of costs. Let's say it's gonna cost us CAD 125,000 to do what we're planning to do. So overall, to refinance at this time is, for us, the preferred choice.
So now it's a question. And I call it, as you would say, it's execution. So can we execute on this plan? And that's. So fallback, we go for a debenture because we have no choice, and our preferred choice is equity financing because we're saving a ton of money, and we're not stuck with a product for a 5-year term. So that's basically the direction we're taking, and I'm repeating, it's not done. So it's two scenarios, and we have a preferred one, and we have a backup if we need to.
Okay, great. Thanks. Yeah, that's it for me.
This is the conference operator again. If analysts would like to ask a question, please press star then the number one. Your next question comes from Sumayya Syed with CIBC. Your line is now open.
Thanks. Good morning.
Good morning.
Wanted to follow up on just the prospects for releasing that industrial vacancy in Laval. I think previously you indicated potentially seeing market rents in the range of CAD 14-CAD 16 versus, I guess today you're saying updated rents of 11-13 range. I'm just wondering what's behind the lower expected rents, if that's just reflecting stabilization in the broader industrial market?
Sumayya, I'm trying to be conservative when I speak to the market. I'd rather, I'd rather surprise you positively than negatively. Obviously, there's been a little bit of softening in the industrial market. I'm sure that you saw all the results from the different cities in Canada, and we're seeing that there's an increase in vacancy rates throughout the country. And as a result of it, I think that the fact that there's more properties on the market than there were, and also properties that like there's been an increase in the construction in Laval of brand-new products.
So we're competing with brand-new products, and if the developers of the brand-new products you know, they probably can get CAD 16, but if all of a sudden they decide to hit the market at a lower rate, then we would suffer. So it's marketability. I say to the- I said to you this morning, between 11 and 13, we're in the market right now at CAD 14.50. So the asking price is CAD 14.50, but I'm basically looking at it and saying that I think that there's a market effect that we're gonna have to take into account and for this property.
Okay, that, that's fair enough. And then for the balance of the leases left to mature this year, I think you have about 200,000 sq ft of office that is maturing. Just curious what your expectations are for that space?
Well, if we look at our crystal ball, we don't anticipate huge problems on the leasing effort for lease renewals. We think that this year we're gonna be able to complete. This quarter, we renewed 80% of our leases, plus leases that were maturing in 2025 and 2026. So, we're still very confident that we're gonna achieve a great number as far as our lease renewals for the year.
Okay, great. Thank you.
At this time, there are no further questions. Please go ahead, Mr. Léonard.
Thank you, Joelle. Thank you, everybody, for participating in our call this morning. As you can see, I think that there are two events that were a little bit new to us. The bankruptcy of Énergie Cardio, sorry. And the quick turnaround, where we were able to release that property. Then we're faced with this 133,000 sq ft vacancy in the industrial segment, that we think that we're gonna be able to fill, not as rapidly as Énergie Cardio, but we think that we're gonna be well-positioned in the market. As Stéphanie mentioned, it's the property is well-located. Everybody in Laval knows this property.
As a result, it should attract tenancy that seek good visibility on a highway. As, aside from that, we are still conducting our business. We have ways of addressing the debenture, as we discussed, that comes to maturity on October 31st, and it's not something that we're forgetting, and it's something that we wanna put our final scenario in place by September 15th, at the latest. So we're steadfast in trying to get all the commitments that we need to do on our preferred scenario. We strongly believe that the preferred scenario is the way to go for us for the long term. So with this, we thank you very much for participating and supporting BTB in our efforts to conclude all of these challenges.
Thank you very much.
This concludes today's conference call. You may now disconnect.