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 2023 second quarter results conference call, for which management will discuss the quarter ended June thirtieth, 2023. 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-quarterly-meeting-presentation. 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 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 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 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, Management Discussion and Analysis, and 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, and Mr. Mathieu Bolté, Executive Vice President, Chief Operating and Financial Officer. Mr.
Léonard, you may begin the conference.
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 sq ft of real estate, divided amongst 75 properties for a total IFRS value, a little bit north of CAD 1.2 billion. During Q2, we did proceed with an acquisition of an industrial property of almost 84,000 sq ft 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 six 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. What's happening is that we 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, that, that activity.
With an objective of owning 60% of our portfolio in the industrial segment and 20% in retail and 20% in the downtown core office segment. We did proceed with a geographical diversification of our portfolio through the last two years. It's important to note that in Edmonton, we didn't own any properties in Q2 2021. Now, it's, it represents 7.7% of our portfolio. In Saskatoon, nothing in 2021, 3.9% today. Ottawa, we were at 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 Quebec City, same notion. We were at 25.5% overall, We're down to 18.6% today.
Montreal, relatively stable, 54% in 2021 and 55% today. 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. A nice uptick in the occupancy rate, the committed occupancy rate at 94.1%. We did file during the quarter a renewal, I call it the renewal of our base shelf prospectus, so we had one that was maturing, and we did de facto renew it for a period of 25 months.
If we go to our leasing and renewal activity, so we did conclude 125,000 sq ft of new leases in Q2, and the lease renewals, if we look at it as a whole, it was 164,000 sq ft, 72%-70% out of the 233,000 sq ft that were maturing and concluded 44,000 sq ft prior to the end of the term during this quarter. Of the 69,000 sq ft that expired during the quarter and not renewed, we did lease 54, almost 56,000 sq ft 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.
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, we did conclude 330,000 sq ft with Continental Capital and Thurber Engineering of almost 10,000 sq ft in Ottawa. What's noteworthy also is that we achieve a cumulative average increase of 66.2% in the rent renewal rate since the beginning of the year in the off-downtown core office, and 5% in the, excuse me. Yeah. 5% in the off-downtown core and necessity-based retail at 4.2%. A very healthy leasing activity.
With this, I'll ask Mathieu to delve into the details of the financial highlights of the quarter.
Thank you, Michel. Good morning, everyone. 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 segment. Rental revenue increased by 9.4% compared to the same period last year, considering the acquisition net of disposition 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 three asset classes. 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 happened at the beginning of the quarter, and we were able to replace it at the end of the quarter, so in June. It's really just a quarter impact. If we look at this asset class, we should be at a run rate of +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, it's specific to the Quebec portfolio year-over-year. We're just actively focusing on the leasing efforts and the strategy in that specific region. The necessity-based retail segment increased by 15.9%, and it's really due to the high demand for our sites and the lease increases. Recurring FFO was CAD 0.118 per unit for the quarter, compared to CAD 0.114 per unit for the same period in 2022. On a cumulative basis, the recurring FFO per unit was CAD 0.235, which represent an increase of 6.1% compared to last year. Recurring AFFO payout ratio was 69%, 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 loan, 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 CAD 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 68.9%, 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 CAD 49 million of mortgages coming to maturity during the next six months, for which we already have commitment letters for CAD 36 million. There's only CAD 13 million left that we're working at the moment. Finally, the trust held CAD 3.7 million of cash at the end of the quarter, and CAD 23.7 million is available under the credit facilities. We did increase the available amount under our credit facility by CAD 10 million, and we still have an option to increase it by an additional CAD 10 million. This completes our presentation, and we'll move to the Q&A.
This is a conference operator. At this time, I would like to remind everyone that analysts may now ask their questions by pressing star, followed by the number 1 on your telephone keypad. Again, if you would like to ask a question, please press star and the number 1. We will now pause for just a moment to compile the Q&A roster. Your first question comes from Mark Rothschild with Canaccord. Please go ahead.
Thanks. Good morning, everyone.
Good morning, Mark.
Good morning.
Michel, when you're talking about your, the asset class diversification you would like, does that assume that you just won't do acquisitions in other areas, and the growth will be mostly in industrial? Well, should we expect you to continue, you know, finding deals in, 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.
We are concentrating in the industrial segment, Mark. We're not, we're not looking at investing in, in the other segments.
To the extent you find, you know, a greater volume of deals and you have the capital, that number can grow well above 60%?
Yes. It's just that, Like, what, what I'd like to, to, for, for all to understand is that we are basically, shifting or pivoting to the industrial segment in an organized fashion. We're not going to, all of a sudden, sell at discounts and so on. You know, the properties that we have in the other segments are, are doing extremely well. You're seeing it from our numbers. As a result, you know, it would be very difficult for us to, all of a sudden, do a fire sale. We're not, we're not in the fire sale business. We are operating our properties, and they, and they're producing good revenues. You saw that, you know, we do have an issue in Quebec City, where, in that city...
The numbers that we publish about Quebec City are a little bit skewed because we have Three Rivers that slumped into Quebec City. Three Rivers, we own one property, and it's 60% occupied, and that's basically an impact, I think, of roughly 3% on the Quebec City portfolio. We do have, if we, if you look at our portfolio in Ottawa, you look at our portfolio in Montreal, in Western Canada, you see that the numbers are very high as far as the occupancy rate is concerned. Now we're really concentrating on Quebec City in order to better our rates of occupancy.
For that, we have to better that, the performance of that portfolio before even, you know, considering eventually selling those properties.
Understood. Maybe with some of the other markets that you're in outside of Quebec, to what extent do you believe that you have to have presence in these markets over time to justify going there? Does that not really matter, each asset individually works?
It doesn't really matter because we, 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. We do have boots on the ground. We, I mean, I think that the critical mass of the portfolio calls for boots on the ground anyway, and as a result, we made the commitment to hiring somebody and furnishing whatever we need to furnish to that individual in order to do his work properly. We, we're committed.
Okay, great. Thank you so much.
Your next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning, Matt.
Just with regards to the, the lease maturity profile, I mean, I mean, you're sitting at pretty low in-place rents on both necessity-based retail and the, the off-downtown core office portfolios. I mean, do you, do you believe that that provides a bit of upside in, in 2023 in terms of where spreads will be? As we look into 2024, I mean, still office here at CAD 15 rents and, and necessity-based retail is just a tad over CAD 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, a, a lease standpoint.
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 CAD 6 net for part of the space and CAD 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. Right now, the renewal rate is for part of the majority of the space at CAD 10 net, and the other part, I think, is at CAD 4 or CAD 5 net. A substantial increase is coming our way in the form of that government lease, which is roughly 60,000 sq ft. Yes, there is an opportunity to increase rents, and that's what we're working on.
Where we have less of an opportunity is in the industrial segment, because, yes, there are leases that come to maturity, but it's not really substantial. We, 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. You know, we have our strategy in place on that front, but we do know that whether the retail segment or the office segment is gonna produce more revenues as a result of the numbers that you're talking about.
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?
No, not, not, not more than what we've done in the past.
Okay. Is there any update with regards to kind of the density potential, on the retail sites and monetizing that and where, where we currently stand at this point in terms of...
We are waiting for, the, the city has started a process of, of a chain, of, affecting the zoning change, so the process has begun. We're part of it, and, and as a result, there, you know, there, there's gonna be presentations to citizens in, in, in the end of August, beginning of September. We will know where this thing is going at the end of October.
Lastly, for me, just on the, on the balance sheet, just what is, 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, that's zero cap rate stuff. That's, that's, that's great, but how else do we see kind of the balance sheet progressing, and where would, would interest rates be at this point on kind of secured financing across the portfolio?
Well, 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. We do have certain properties on the market, and we're seeing that we have buyers for these properties. 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?
Yeah, I mean, just maybe one thing, because you talked about density as well. I think we think that it's highly probable that, you know, 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, you know, for the CAD 47 million that is left, we're talking about, you know, 200 basis points in terms of higher interest rate versus what is coming to maturity.
That's in the short term.
I just for your 2023 exposure, most of that's already variable, right? If I was getting-
Part of it, yeah. Part of it we don't have a lot of variable exposure, but we do have two properties out of the CAD 47 million that are variable, so those are already adjusted.
Okay. for near term, it's, it's less exposure. I guess 2024, there's a bit more at 4.5% or so.
That's right.
Okay. Just, Michel, going back to your comment on the disposition side, and what type of buyer is it that's, that's looking at these assets at this point? Is it high-net-worth individuals, family offices, et cetera, or there, there are some institutional guys looking at this point?
No, definitely no institution, and it's high net worth and family office, because we're seeing that are harvesting these, these acquisitions.
Perfect. Thanks, guys.
Your next question comes from Gaurav Mathur with iA Capital Markets. Please go ahead.
Thank you, and, good morning, everyone.
Good morning.
Good morning.
Just, 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, you know, your debt coming to maturity. How are you thinking through refinancing versus repayments, for 2024?
In terms of refinancing, we do plan to refinance all those loans. Most of them, it's a lot of small assets. I think it's in total, it's 18 properties that we have to refinance. We don't have large, big assets, you know, with more risk to refinance, for example. It's not the case for next year, but it's gonna be some work just to have all the smaller assets to be refinanced, but I don't see any, any risk. We're trying to, to be proactive with those. I mean, some, I think there are six assets that have to be refinanced in January, so we already started to work on those, on those, and it's mainly with one bank. The discussion is ongoing at the moment.
Okay, great. Then just switching, back to the leasing activity, this quarter, you know, retail definitely stood out. Could you just talk a little about, you know, what kind of tenants are looking for space and are willing to provide, you know, these rent bump ups?
Well, mostly national tenants. We have in Québec City, in Lévis, proper Lévis, we own a center where it's grocery anchored by Walmart. We renewed the lease of Walmart two years ago for 10 years, and there were, I think, three years left, so maybe we still have another 12, 13 years left on that lease. As reported by others, there's an immense leasing activity in the retail segment, especially from national retailers. 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.
That creates an immense opportunity for retailers, and we're basically, I don't wanna say the only game in town, but let's say that, we're the only game in town. As a result, we were able to lease space to BBW. We leased space to Sephora, and now we're in again, in an LOI situation with a national retailer for 12,000 sq ft. We're in an NOI stage with another national retailer in order to build density on the site for 43,000 sq ft for a retail store. All of a sudden, we're changing the face of that retail center. 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 with these tenants.
All this started from, if you remember at 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 Quebec province. As a result, we're reporting, I mean, we didn't talk, we didn't obviously in the MD&A, we're not talking about the LOI with this 43,000 sq ft tenant, because it's still conditional and all this, and we can't report nor really discuss it until the lease is firm and signed. We're nearing that opportunity there.
You know, and I, I saw the, the, your report, Gaurav, when you talk about Plaza, and Plaza is basically experiencing the same kind of traction within its own portfolio. It, it looks that, you know, the dire days of the retailers are basically over, and we're talking about a new day, and it's really. It, it's fun for us because it, it, it allows us to redensify a site, create new opportunities for our tenants. In that particular site, basically, I don't wanna say it crudely, but let's say I'll say it anyway, getting rid of some troublemakers as far as tenants are concerned.
Okay, great. Well, it's good to know the reports are read, but, you know, that leads me into my next question. As these national retailers come in and occupy the space, on the lease structure, are any of these, you know, rent increments or rent escalators linked to CPI?
No, they, they generally fix rents. Let's say we do a 10-year term. Usually, we fix rents for five years, and then there's a bump for the next five years. That's sort of.
Okay.
the pattern.
Okay, great. Thank you so much for-
They don't, they don't, they, they don't grow by CPI.
Okay.
Now, we're.
Thank you. Thank you for the call, gentlemen. I'll turn it back.
Thank you.
This is the conference operator again. If analysts would like to ask a question, please press star and one. At this time, there are no further questions. Please go ahead, Mr. Léonard.
Well, thank you very much for participating this morning. Appreciate your participation after your three-day weekend for most of us. As you can see that there's a lot of leasing velocity occurring, as we reported in our MD&A, not only is it in the industrial segment where we're full, it is also in the retail segment. To, to our, I won't say surprised, but the fact that there's 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. As a result of this, we're seeing expansion in the office sector, mainly from professional firms.
We have accounting firms expand, expanding, engineering firms expanding, engineering firm, firms moving into new areas. Based on this, we're, we're quite, we're quite pleased with the performance of our portfolio, and we feel that it's going to continue throughout this year. The first six months, we're extremely busy on the leasing front, lease renewal front, and I, I can even give you some color. There was a, a large tenant, 18,000 sq ft, wanted to renew, however, wanted to basically give back 5,000 or 6,000 sq ft. By the time we concluded the transaction, they renewed for 18,000 sq ft. I, I, I hope this is a trend, but in our portfolio, we are definitely seeing it as a trend.
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. You know, most of articles that we read are about downtowns of this in North America. 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 signs that we're turning the corner. Thank you very much again for your participation. We enjoyed publishing our numbers. It's always fun when the numbers are good. Good to great.
Thank you very much, and we'll see you next quarter.
This concludes today's conference call. You may now disconnect.