Good morning, and welcome to PROREIT's First Quarter Results Conference Call for Fiscal 2024. At this time, all lines have been placed on mute to prevent any background noise. Management will make a short presentation, which will be followed by a question-and-answer period, open exclusively to financial analysts. To ask a question, simply press the star key, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. For your convenience, the results release, along with the first quarter financial statements and management's discussion and analysis for fiscal 2024, are available at PROREIT.com in the Investor section and on SEDAR+. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements and non-IFRS measures.
PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements, or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, level of activity, performance, achievements, future events, or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.
For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A, dated May 8, 2024, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as at May 8, 2024, and except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. The discussion today will include non-IFRS financial measures.
These non-IFRS measures should be considered in addition to, and not as a substitute for, or in isolation from, the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the first quarter earnings release for fiscal 2024 and non-IFRS measures section in the MD&A for the first quarter of fiscal 2024 for additional information. I'll now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT. Please go ahead.
Thank you, Chris. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary, and Zachary Aaron, Vice President of Investments and Asset Management. Let me begin by saying that I'm pleased with our performance in the first quarter of 2024. Despite ongoing economic uncertainty, we remain committed to optimizing our portfolio and our balance sheet. Our shift towards the industrial sector in recent years has proven to be the right strategy. In the first quarter, our portfolio generated same-property NOI growth of 7.8% year-over-year. On a segmented basis, our industrial sector, which represents about 76% of our total same-property NOI, delivered 7.8% growth in Q1 over last year. The increase was driven by robust leasing, leasing renewal spreads and rental steps.
At March 31, 2024, the weighted average in-place rent for our industrial portfolio was CAD 8.53 per sq ft, an increase of 9.4% compared to the same date last year. We're also pleased with our office segment, which delivered notable same-property NOI growth of 17.6% year-over-year, mainly as a result of increased occupancy compared to the same period in 2023. During the quarter, we were active on the transaction front to rotate capital away from less attractive assets. We completed the sale of three non-core properties for a total gross proceeds of CAD 26.1 million. With respect to the transactions, in February, we sold two non-core properties located in Nova Scotia and Quebec, totaling 124,000 sq ft.
A portion of the total gross proceeds of CAD 20.7 million were used to repay about CAD 16 million in related mortgages and the balance for general business purposes. In March, we sold a third non-core retail property totaling approximately 11,000 sq ft in BC for gross proceeds of CAD 5.4 million. These proceeds were used to partially repay a CAD 9.4 million mortgage secured by additional retail properties. We therefore ended up the first quarter with 120 investment properties, corresponding to approximately 6.2 million sq ft of GLA. At the same date last year, we owned 130 properties. Both periods included 50% ownership interest in 42 properties with our partner at Crestpoint.
Our property sales in the quarter allowed us to reduce our total debt by CAD 25.1 million compared to March 31, 2023. In Q1, we also entered into a binding agreement for the sale of two non-core retail properties for total gross proceeds of CAD 7 million, excluding closing, closing costs. These sales are expected to close in the second quarter, with net proceeds to be used to repay a portion of our outstanding credit facility and for general business purposes. These two additional sales will bring our industrial segment to 83.1% of total GLA and 76.1% of NOI on a pro forma basis. Our leasing activities continue to be strong.
To date, we've renewed 55.6% of GLA maturing in 2024, at a positive average spread of 33.5% for the entire portfolio and 47.7% for our industrial properties. We're also very pleased to have signed a new lease for 128,000 sq ft of space, due to expire in January 2025. The lease, starting in February 2025, was signed with a new quality international tenant for a 15-year term, with annual rent steps and a base rent in excess of 30% over the expiring lease. We continue to benefit from an overall high quality and resilient tenancy base. Our occupancy rates remain solid at 97.7% at March 31.
This has been temporarily impacted by transitional vacancies in several in select industrial properties, which are currently experiencing good leasing momentum. As for our property management division, we managed approximately 10.8 million sq ft of GLA at quarter end, 6.2 million of that properties were our own. Finally, on the ESG front, we published our latest annual sustainability report yesterday. As we continue to adapt to evolving stakeholder expectations, our report highlights our commitments, strategy, and accomplishments relating to our ESG factors. For example, a lot of effort has been made to increase our data collection capabilities throughout the year. We engage with a third-party supplier to monitor and measure our greenhouse gas emissions.
We are proud of the progress we have made, but recognize there is still work to be done to improve as we move forward on our ESG journey. I'll now turn the call over to Alison for a more detailed review of our financial results. Alison, over to you.
Excuse me. Thank you, Gordy, and good morning, everyone. Our financial discipline contributed to our ability to deliver good results in the first quarter of 2024. Property revenue for the first quarter increased by 1.7% from CAD 25.3 million in Q1 2023 to CAD 25.7 million in Q1 2024. Net operating income increased 1.9% from CAD 14.5 million to CAD 14.8 million. We are pleased with the growth achieved despite having 10 fewer properties in our portfolio compared to last year. General and administrative expenses for Q1 2024 were down by CAD 2.1 million compared to the same period last year, mainly driven by one-time retirement and CEO succession costs in 2023.
Net cash flows provided from operating activities in Q1 2024 amounted to CAD 9.7 million, down slightly from CAD 10.6 million in the first quarter of 2023. AFFO totaled CAD 7.4 million for the quarter, down slightly from CAD 7.8 million compared to the same quarter last year. Our basic AFFO payout ratio was 91.6% for Q1 2024, up from 87.0% in Q1 2023. This variance was mainly driven by the decrease in the properties owned, in addition to higher interest and leasing costs. Turning to our balance sheet. Our liquidity position remains strong, with CAD 39.5 million available through our credit facility, in addition to CAD 11.6 million in cash at March 31, 2024.
Our total debt, including current and non-current portions, totaled CAD 493.6 million at March 31st, 2024 , a reduction of CAD 25.1 million from March 31st, 2023 , as Gordy mentioned. Total debt to total assets also remained stable at 49.3% at March 31st, 2024 , compared to 49.2% at the same date last year. Our weighted average interest rate on mortgage debt was 3.89% at March 31st, 2024 , compared to 3.70% at the same date last year. As for the remaining mortgages maturing in 2024 , they amount to CAD 17.8 million, and we expect to renew them at market terms.
The weighted average cap rate for the portfolio was approximately 6.6% at March 31st, 2024, up from 5.9% at March 31st, 2023. Finally, we maintain our distributions of CAD 0.0375 per unit for each month in the first quarter of 2024. Gordy, back to you for closing comments.
Thank you, Alison. We started the year on solid footing, and we continue to focus on strengthening our portfolio and managing our balance sheet with discipline. Once the market stabilizes, we intend to be opportunistic and further increase our footprint in the industrial sector, in regions where we already have a presence. The dedicated, dedicated team we have at PROREIT remains the cornerstone of our success. Thank you, everyone, for a strong start to 2024. That concludes our remarks. Chris, over to you for the Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Mark Rothschild, Canaccord. Mark, please go ahead.
Thanks, and good morning, guys.
Good morning, Mark.
Hey, we've seen some increase in availability, for industrial properties, and I know it's, property-type specific, even in industrial. I wonder if you could just talk to what you're seeing for your properties and then, you know, how do you see this impacting your, organic growth over the next couple of years?
Yeah. So, thanks, Mark. I mean, for example, this quarter, we're down a little bit in occupancy. We have 40,000 sq ft come due in Woodstock, Ontario, in February, and we're working on a new lease for that. But you'll see that 40,000 is a contributor to the slight drop in our occupancy for this quarter. So depending on when we lease that up, it'll affect next quarter as well. But yeah, what we're seeing is, and Zach can jump in as well. You know, we've got three spaces, basically, about 30,000 sq ft. One in Winnipeg, 28,000, where we've got leased, but just on a temporary basis, so we've been trying to get that filled on a long-term basis.
We've got 28,000 here on the island in Montreal, great space, that's been vacant for 6 months now. We've been close on a couple of deals on that, and then this new 40,000 sq ft in Woodstock. So that's what we're seeing. It's you know 30,000 sq ft space taking a little longer than what we've seen in the past. That said, I think every rent that I mentioned there is coming off of CAD 6 rents, and you know on the island right now, the folks are looking for CAD 15 for that kind of space that we have. Woodstock is going to be from CAD 6, going to probably close to CAD 11, and then Winnipeg is CAD 6-CAD 9.
So, those are all positive things for us that way. It's just, you know, you're seeing some transitional vacancy there. But certainly, the larger spaces are taking a little longer. You know, we're seeing that. And this is, you know, this is good, good space. Woodstock's 28-foot clear, 2007 built building, you know, perfect for whatever it's needed for. But, yeah, we just kind of see that specific to all of our markets, and I think the big, the general view across the country is the larger spaces are taking a little longer to lease.
Okay, great. Thanks. And then in regards to the asset sales, you've been pretty clear over the past couple of years that you're going to be disciplined and not just selling non-core assets just to get rid of them, but to get the prices you want, and you get them done now. To what extent have you been maybe giving in a little bit on the price just to get that transition? The numbers of industrial higher relative to other properties that you own.
Well, we've been marketing all of our stuff at fair value, obviously. And then, so I mean, on these sales, basically, we're getting the values that we think the assets are worth in, in this market. So, we haven't seen significant, you know, really, people coming back at a deep, deep discount, you know, once they've signed a deal, you know, and us having to, to bend over to, to that. I mean, that's just the stuff that we're selling is pretty straightforward, I guess. So we really haven't seen that. I mean, vendor takebacks, I think on a few smaller assets that we did a while ago with a, with a small private, you know, we, we did a CAD 500,000 VTB, but nothing like that on these sales.
It's a couple of Toronto institutions that have kind of looked at a couple of assets that we have and liked them, and then they, they keep offering on other assets that we don't have for sale. So that's a little bit to what we've seen. The office, as you know, it's, it's available, but, we're working on a couple of transactions there. We'll see if they come to fruition. But, you know, the market, I think, for good, good, office these days is probably CAD 150-CAD 170/sq ft, is kind of what, what we're seeing. So if we see, you know, bids in that area, we'd be interested in that, you know, to just t hat, that the office assets we have has some short-term debt on it.
It's pretty high rate. So, you know, to the extent we can, we can sell those, we'll do it.
Okay, great. Thanks so much. I'll turn it back.
Thank you. Your next question comes from Brad Sturges, Raymond James. Brad, please go ahead.
Hey, good morning.
Good morning.
Just to go back to your commentary on the transitional vacancies, is that mostly in Q2, or what would be the timeframe you're expecting in terms of lease up?
The property in is a 28,000 sq ft on the island, and that's been vacant for a while. So you already have that in our numbers. And as well, we've got this temporary tenant in Winnipeg, so that's been in our numbers for the last six months, Zach?
Yep.
So I mean, that's just an upside discussion when we get a new tenant. The 40,000 sq ft, that's brand new, so they left in February. So, you know, if we don't get it leased up by June thirtieth, obviously we'll be down on this 40,000 sq ft for the quarter. But and then, you know, the asset sales that we have ongoing as well will affect slightly, but offset by you know, the increases that we're seeing in our cash flows, that you've seen the, you know, the last two quarters were 10 less properties than we were last year, and we have more NOI, right? So, some of this is offsetting and, effectively, you know, we're liking what we're seeing.
If we got this other 100,000 sq ft lease, we'd be happy with our year for sure.
And in terms of what's left to do for expiries, there's nothing else of material note that you would expect to get back at this point?
At this point, no, not really. What of what's remaining is probably 80%-90% of the remaining GLA expiring this year is industrial. Most of the office, and retail that has come due this year has already kind of been renewed or backfilled. There's one chunkier, kind of 15,000 sq ft of office that come due, in Q3, that we're working, on a potential backfill deal there. Industrial-wise, you know, given that the majority of our portfolio is small bay tenants in the 5,000 sq ft range, that's really what we're mostly dealing with, you know, especially in our Burnside portfolio. So there's to's and fro's in that, as there always is in small bay, but nothing, wildly material at this point.
Okay. Congrats on the leasing, the new lease that you signed for 25. I'm curious, you know, there's contractual steps. Are you able to disclose what those steps would look like?
Yeah. There are 3% annual rent escalations over the 15-year term.
So the previous lease expired in January and then the new ones in February, so there's a little bit of downtime, I assume. And would there be any free rent associated with this new lease?
No, no downtime or no free rent.
Okay. Um
A little bit of a, a TI, obviously, for a 15-year lease, but,
Okay
structured, so we don't have any downtime at all for that space.
Okay, that's great. Are you able to say who the international tenant was, or is?
Zach tells me not yet, but they, they may have something out in the next little bit, so we can probably talk about it in the future.
Okay, sounds good. I'll turn it back.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one on your touchtone phone. Your next question comes from Sam Damiani, TD Cowen. Sam, please go ahead.
Thanks. Good morning, everyone, and yeah, congrats on a great quarter. Just first question is, I guess you commented that, you know, the leasing is taking a little bit longer. I'm just wondering what you would attribute that to specifically.
Yeah. So thanks, Sam. So obviously, what we've seen is, you know, availability increase for industrial across the spectrum. But what's really showing its face now is this bifurcation of large bay versus small bay, where most of that availability that you've now seen across the country is really just a statistical thing, where now, previous buildings that were under development, that are now completed developments, those now get tracked as vacancies if it was not pre-leased. So that's where you kind of see the rise in availability across the markets. And all those new developments are 90%+ for large bay spaces. So simply put, if you are a larger bay user, you know, think 50,000 sq ft or so and plus, you now have more options available in the market.
Plus, a lot of the users in that space, you know, a lot of the 3PL type users, you know, given the shakier economic environment, are now more hesitant to either expand or take on more space or additional spaces. So you're just seeing less leasing requirements for these larger scale users, and there's more availability and options. So it's just taking some more time, given that tenants have more options than they did before, and there isn't that, you know, crazed rush like we saw kind of in 2020, 2021. But spaces are still getting leased at good rates, just taking a bit longer than we got used to, in peak COVID times.
That's really
And just to piggyback on that, Sam, specific to the properties we have. So the Côte-de-Liesse property out by the airport here, 28,000 sq ft. You know, we had potential deals on those. One was the light manufacturing. They wanted more power than we had in the building, so we do the math on that, and they didn't want the building till the beginning of 2025. So to be honest, we didn't work too hard on that because we thought there'd be easier deals out there. And then when we look at, for example, this Woodstock, we thought we had a tenant to take over there, 3PL carrier. But what we're learning on a lot of these things is those groups are, you know, subject to the contracts they have.
So they try to secure space, and then if they don't win this contract or renew the contract that they're bidding on, they go away. So that's, like, two specific examples of ours. It's not like the space is vacant. And, you know, when we're
W e're picky because, you know, we have CAD 6 rents in these spaces, so we don't need to, we don't need to do anything specifically fast on these. These will, these will lease at, at what we think is, you know, significant increases in rent and value.
That's really helpful as well. And so just with this transition that the market's gone through over the last couple of years, like, how confident are you that that shift has run its course, or do you see the market loosening up further?
Yeah, it's hard to say. I think what you started to see, you know, over the course of the end of 2023 and going into 2024, is land transactions are, are virtually nonexistent right now, and a lot of development projects in the industrial world, you know, have now been shelved. Just as, you know, more inventory comes online, there's less pre-leasing, and there's challenges with costing. You know, construction costs are still elevated, financing costs are still elevated, and now there's less certainty around market rents and exit cap rates and those kind of items.
So I think as, you know, some of the development starts to trend off and slower, absorption kind of remains steadily, and you know, if we see some of these rate cuts and the economy maybe picks up a little bit, you know, we could see this dynamic where, you know, throughout 2024 going to 2025, things are kind of in this steady state. But then we might get back into a space crunch again, especially for larger bay spaces, if the economic environment improves and development hasn't caught up to what, you know, we've been seeing over the last year or two. So there's a bit of that dynamic that's more specific for large bay spaces. When it comes to small bay industrial, which again, is kind of the majority of our portfolio, there is virtually zero new development because it's just not economically viable.
We still see a lot of strong leasing momentum, both in terms of the times of backfill vacancies and the market rents we're achieving.
That's helpful. Last one for me is just on the sublet market. How much has that changed in terms of your ability to, you know, transact leases? Like, is that I assume the sublet availability has gone up as a portion of total availability. Is that impacting, you know, the rent that you're actually able to achieve? Or, you know, is it just too different that it's not really comparable?
Yeah, you know, at least looking at our portfolio, it's really not something we've come across. There's virtually. I'm not familiar with any of our spaces on the market for sublease. Truly, my understanding of the sublease market, where it's. Yes, it's contributing more to the availability, you know, across the country. It's really the Amazons of the world. I think Amazon in the GTA has, like, something like 2 million sq ft on the sublease market and other 3PL-type users who took on a lot of space or a bit too much space again in peak COVID times, and now they don't need as much of it. So I think that's the sublease availability, which is just not the type of space we either have or truly competing with.
When it comes to small bay, again, it's a very different dynamic, a stronger dynamic, I would say, where we just haven't really seen any subleases in our, in our markets or our properties come around, so it's not really something that we have to compete against or we're seeing much of.
That's great. Thank you, and I'll turn it back.
Thank you. Your next question comes from David Chrystal, Echelon Capital Markets. David, please go ahead.
Thanks. Good morning, guys.
Morning.
Are you seeing any tenant solvency issues across the portfolio, and are any cracks starting to emerge?
Hi there, it's Alison. At this time, no, we haven't seen any tenant insolvencies. Our collections have been on point. We have, you know, no indication of any weaknesses in our tenants, at this time.
Okay. And I know it's a small kind of component, but the office leasing over obviously the quarter, and I think the last lease sign might have been in the second quarter last year, but we're seeing decent spreads versus expiring. Are there significant incentives tied to that leasing? And can you maybe comment on the change in net effective rent there?
Sure. So yes, over the last few years, obviously, with everything that's happened in the office space, availability has gone up across the board. Yes, in order for landlords in most markets, depending whether it's suburban or downtown, is, you know, larger incentives, whether it's free rent, TIs, creating turnkey spaces, has definitely been on the rise, and so that obviously impacts your net effective rents. It's hard to say one deal to another because it depends whether it's a renewal, whether that space was already built out or it was already in kind of base building form. So yes, you are seeing significant TI packages being provided to tenants.
And really the name of the game for most office, whether it's suburban or downtown, you know, across the country, is being able to create turnkey spaces for tenants where they can come in and the spaces are ready to be operated in, you know, from day one. So that obviously comes as a cost, just given that construction costs are still elevated across the board.
Can you maybe comment on the buyers that are in the market, maybe kicking the tires on some of your office properties?
Yeah, sure. So, you know, obviously our, you know, our office portfolio, we only have six remaining office assets, three in Ottawa, three in Atlantic Canada. You know, you're seeing a lot of transaction activity in Ottawa these days. I think a lot of the buying action, especially for some of the downtown office buildings, has been buyers looking opportunistically for either, you know, a conversion or a demolish and conversion to residential. In some of the suburban markets, I think you're seeing, you know, local private groups, kind of regional private groups, who are, I would say, you know, groups who have been around, they already own office, they understand office, and now they're seeing some opportunity where they think they can buy at, you know, what are now bottom-based prices, with good long-term upside and sense of they have attractive going and yields.
They have expertise and operational expertise in that domain, and they think they can, you know, you know, improve vacancy, you know, improve market rents over time. And, you know, probably banking a little bit on the return to office, just as, you know, a weaker market maybe gives some employers some leverage to ask employees to return. So it's hard to say, but it's definitely dominated by private groups, you know, opportunistic for residential conversion or just local players who have a good, you know, operational view of how to operate these assets and get them at good prices.
Okay, great. Appreciate that color. I'll turn it back. Thanks.
Thank you. Your next question comes from Sumayya Syed, CIBC. Sumayya, please go ahead.
Thanks. Good morning. Just wanted to maybe drill down on in your Halifax market and seeing what you're seeing there in terms of trend. Obviously, it's been seen an uptick in supply, and just curious what you're seeing on renewals there, and if you can remind us of the mark-to-market on your Halifax portfolio, please.
Yeah, I can jump in just on the new build and stuff, and Zach can jump in on the renewals and that. I mean, you know, we're seeing this. I don't know, depending on who you talk to, 300,000-500,000 sq ft coming on there. And a couple of them are buildings, what you'd be calling more large bay-looking buildings in on the Halifax side, not in Burnside. Where they're, you know, 28- and 30-foot clears are looking for CAD 16 rents. They're carbon net zero buildings, that type of thing. So, and I think there's slow leasing on those. There's a couple of new builds on our side in Burnside. Most of that's leased.
But again, the numbers, you know, the amount that's coming on, on a square foot basis that, you know, move the vacancy to, from three to five seems significant or something like that, but yet it's not really, We're not losing tenants to it. And I think some of the new builders, our construction folks, are hoping that it's brand new tenants coming into Halifax versus, you know, taking somebody from Burnside. But we haven't seen any of that, and it's not really noise to us at all. And Zach can
Sure.
talk about a little bit more.
Yeah. And just to add some more color on the development side, these few development buildings, which, you know, it's 500,000-600,000 sq ft or so of new builds, you know, that's across maybe four or five buildings, half of which is in this Bayers Lake market. But specifically, these are larger bay spaces, so you can think of, you know, 40,000, 50,000 sq ft and up. And again, in our Burnside portfolio, our average tenant size is in the realm of 4,000-5,000 sq ft. So we're, our, you know, our 5,000 sq ft tenant who has, you know, 18-foot clear, some office, retail, showroom space, is not considering the CAD 17 net rent for the 32 clear building, that's 50,000 sq ft so
Across the bridge.
Across the bridge. So we're not really seeing that as a true competition to our existing product. In terms of what we are achieving within our portfolio, to give you some sense, you know, we've done just over 60 renewal deals in Q1 so far in our Burnside portfolio, and our weighted average year one spread on those deals is just over 80%. So we're still seeing very, very strong momentum there. When we acquired this portfolio, you know, in-place average rents were in the kind of CAD 7-CAD 7.50 range. And, you know, being someone who works on the leasing there every single day, the deals we're concluding are in the range now from CAD 13-CAD 16, really just depending on how big the space is and the quality of the space. So we're seeing really strong momentum there.
Market rent has been, you know, way ahead of schedule than we ever anticipated. We don't really see that slowing down, just given that when it comes to small bay, again, there's really nothing new coming online. There is no further increased competition for that kind of product. And we're still seeing a great story, you know, transitioning in Atlantic Canada and Halifax specifically, regarding the growth of the port and the growth of the population there. That's really driving the small bay growth at the same time.
Okay, that's helpful. Thank you. And then just one more looking, I guess, your lease maturity profile and, and your top tenants. I guess you have a somewhat significant one with DRS that rolls in under a year. Is that a space that you're already in discussions? And, just wondering what your expectations are.
That's the same space that we just did the 15-year deal on.
Oh, okay. All right.
Yeah.
Well, that answers that, thank you.
Yeah, that's a good news story, for sure.
Okay. Turn it back.
Thank you. There are no further questions at this time. Please proceed.
Great. Thank you very much. Have a great day, everyone.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.