Morning and welcome to PRO Real Estate Investment Trust's (PROREIT) Second Quarter Results Conference Call for fiscal 2025. 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, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star, followed by the number two. For your convenience, the results release, along with second quarter financial statements and management's discussion and analysis, are available at PROREIT.com, in the Investor Relations and on Cedar Plus. 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, levels 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 August 13, 2025, available at www.cedarplus.ca. Forward-looking statements represent management's expectations as of August 13, 2025, and except as may be required by law, PRO REIT 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 and in isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the second quarter earnings release for fiscal 2025 and non-IFRS measures section in the MD&A for the second quarter of fiscal 2025 for additional information.
I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT . Please go ahead, sir.
Thank you, [Anjali]. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary. Zach Aaron, Vice President of Investments and Asset Management, is also joining us for the Q&A period. I will begin with an overview of our second quarter performance before turning the call over to Alison for more in-depth review of the financial results. We're very pleased with our Q2 performance and the momentum we continue to build. Cash flow growth and positive rental revenue spreads are positively affecting our financial results consistently on a quarterly basis. We're strategically reinvesting capital into opportunities that enhance long-term cash flow and net asset value. We remain firmly on track to become a pure play light industrial focusing on small and mid-bay properties. In Q2, we delivered notable growth. Net operating income rose 4.5% year-over-year.
Same property NOI increased 8.2% led by our industrial segment, which posted an impressive 9.6% gain. We're making meaningful progress executing on our capital recycling strategy toward high-quality industrial assets. On June 26, we completed the acquisition of six industrial properties in Winnipeg from Parkit Enterprise for CAD 96.5 million. This brings our Winnipeg portfolio to 22 properties, totaling 1.3 million sq ft of GLA. As we shared last quarter, this transaction is expected to be accretive to AFFO per unit starting in Q3. This transaction also marks the beginning of a strategic partnership with Parkit, offering future growth opportunities and operational synergies through our platform. We're pleased to welcome Steven Scott, Chairman of Parkit's Board, as their initial nominee to PROREIT's Board of Trustees. He's a welcome addition to the board with his real estate, private capital, and public capital market experience.
After quarter end on August 5th, we entered into a binding agreement to sell six non-core retail properties in Atlantic Canada, totaling approximately 221,000 sq ft for CAD 39.8 million. Proceeds will be used to repay CAD 21.5 million of related mortgages with the balance applied to our credit facilities or for general corporate purposes. We expect this sale, which is subject to customary closing conditions, to be completed in Q3. Including this transaction, year-to-date non-core property sales total CAD 52.2 million, bringing our pro forma industrial base rent to 88%. This puts us on track to reach our 90% target by the end of 2025. Our focus on strong secondary markets remains a key differentiator. According to CBRE's Q2 Canadian Industrial Market Report, Halifax, Ottawa, and Winnipeg, three of our key markets, rank among the top five in Canada for rent growth.
In Halifax, we're one of the largest industrial landlords by square footage. Average rent rental rate grew over 20% year-over-year in Q2, the highest increase in the country. We continue to benefit from robust leasing momentum with renewal spreads reflecting both quality of our portfolio and the strength of our markets. To date, we've renewed 63.1% of our 2025 GLA at an average spread of 35.7% and 52.5% of our 2026 GLA at an average rental spread of 33.8%. The 2026 renewal results represent one of the best performances at this early stage in a leasing cycle. Portfolio occupancy was 97.8% at June 30th, including committed space, slightly higher than the prior period. In Q3, however, our occupancy rate will be affected by a recent vacancy: a 176,000 sq ft single tenant property just off the island of Montreal.
As we mentioned on a previous call, this long-term tenant did not renew their lease, and the property is now vacant. We are actively exploring leasing opportunities and other options for this asset, including demising it for multi-tenant options. The property has significant upside, given its attractive location on the Trans-Canada Highway and the low rate expiring rent. The expiring rent was CAD 4.50 per square foot, while the current market rents are around CAD 9 per square foot. Before I turn the call over to Alison, I want to note that we published our annual sustainability report in July. This is the first year we are disclosing our Scope 1 and Scope 2 greenhouse gas emissions. We've also strengthened our climate-related disclosure by aligning more closely to TCFD recommendations. The full report is available on our website. With that, I'll turn the call over to Alison. Alison, over to you.
Thank you, Gordy, and good morning, everyone. We are very pleased with our second quarter result. Property revenue totaled CAD 25 million, up CAD 0.4 million year-over-year. This is driven by contractual increases in rent and higher rental rates on lease renewals and on new leases. Net operating income, or NOI, was CAD 15.4 million, an increase of 4.5% compared to last year due to these same factors. Same property NOI reached CAD 14.6 million, up 8.2% year-over-year, benefiting from contractual rent escalation, stronger renewal rates, and higher rent on new leases. Funds from operations, or FFO, amounted to CAD 8 million for the quarter, up 8.1%, driven by increases in contractual base rent, higher rates on renewals, and higher rental rates on new leases. This was partially offset by an increase in G&A expenses, primarily due to professional fees. Basic AFFO per unit increased by 3.7% year-over-year.
Basic AFFO payout ratio was 89.8% in Q2 compared to 93.1% for the same quarter last year and 93.8% in Q1 2025. This improvement reflects the revenue drivers just mentioned, offset by an increase in stabilized leasing costs and G&A expenses. The weighted average capitalization rate for our portfolio was stable year-over-year at approximately 6.7% at June 30th, 2025. As expected, following the Parkit transaction, our debt and corresponding ratios rose in the quarter. At quarter end, total debt, including current and non-current portions, was CAD 562 million, up CAD 75.8 million from the same time last year. This increase is primarily related to the CAD 63 million non-revolving credit facility used to finance the Parkit acquisition and the debt related to the Montreal acquisition late in 2024. Adjusted debt to gross book value increased to 50.7% from 49.5% at March 31st, 2025.
Adjusted debt to annualized adjusted EBITDA rose to 9.8 in the quarter compared to 8.8 in the same period last year. Again, this ratio was impacted by the timing of the Parkit acquisition just prior to the close of Q2 2025. We intend to use proceeds from the sale of the Atlantic Canada non-core properties to reduce our leverage and debt to EBITDA ratio once the transaction is completed. Looking at the upcoming maturities, we have CAD 33.1 million in mortgage maturities for 2025. We have term sheets signed for CAD 24 million now, with the balance being dealt with through asset sales or small mortgage payouts. In 2026, we have CAD 155.8 million in maturities, mainly tied to high-performing industrial assets with upside refinancing potential.
For three lenders totaling CAD 127 million of the 2026 maturities, we are in active discussions and have already completed some interim upward financing in 2025, supported by increasing property cash flows. The weighted average interest rate on these maturing mortgages is 4.8% for 2025 and 3.8% for 2026. Finally, we maintained our distribution of CAD 0.0375 per unit for the second quarter of 2025. Gordy, back to you for closing comments.
Thank you, Alison. Our strong performance in the first half of 2025 demonstrates that we're successfully executing on our strategy and remain firmly on track to become a pure play light industrial lead. We also remain fully committed to working hard towards our medium-term debt ratio target and maintaining a resilient balance sheet. Looking ahead, we're well positioned to pursue value accretive opportunities and drive sustainable long-term growth to benefit all of our unit holders. Finally, I'd like to thank our team and the Board of Trustees for their continued dedication and support, and to our unit holders for their trust. Anjali, we're now happy to take some questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Mark Rothschild with Canaccord. Please go ahead.
Thanks, Ma'am. Good morning, everyone. Maybe just following up on your comments regarding the balance sheet and with the transactions, the retail sales, the sale of the retail assets, rather. How are you thinking about potential dilution from that sale? Is that really just stretching the balance sheet from earlier deals? Is that maybe combined with future acquisitions you have? Just trying to see where you expect to operate over the course of the year and how we should look at the asset sales.
Yeah, so I mean, we're CAD 50+ million for the year. We potentially have another CAD 20 million in asset sales, not firm yet. When we complete that, in our mind, we'd be over 90%, which is our target for industrial-based cash flow. For largely a better thing for the last three years, we'd be done in that transition. We may look at where we are with our debt and debt to EBITDA at that time. We may have room for an acquisition towards the end of the year. The bond rates jumped up 25 basis points since we did the Parkit deal. There could be a differentiation on pricing on assets as we go through the last six months of the year. Effectively, we'll be largely done with this quote-unquote transition. We'll be left with largely some grocery-anchored retail and a couple of small office buildings.
That would be de minimis to the entire portfolio. We may have an acquisition, a weight of that. We'd be paying down debt towards the end of the year.
Okay, great, thanks. Maybe just one more for me. In regards to the 2026 debt maturities, there's quite a bit coming up. Do you plan on just waiting throughout the year and dealing with it as mortgages mature? Is there something specific that you would do because it is a relatively big number? You know, as you noted, rates have come up a little.
Yeah, I mean, some of that debt is 3%. You're four and three quarters in out of five, with this little blip that we have. The positive thing of this is the longer we wait, the more cash flow that comes into the properties, so the better financing, you know, from a leverage standpoint and cash flow that we can get. As Alison alluded to, CAD 127 million of this debt is with three lenders, which we've dealt with this year. They've already actually underwritten the properties for the incremental cash flows coming in. It would just be a timing thing, I think, for 2026. Some of it comes due in April, some July, and some in September. We're just going to manage that through as we go. 3.8% is the average of that debt now. Obviously, it'll be a little bit more than that, 4.5%- 5% likely.
In our five-year cash flow, we have that market debt coming in and still see significant cash flow growth over 2026 and 2027.
Okay, great. Thanks so much.
Thank you. The next question comes from Brad Sturges with Raymond James. Please go ahead.
Hey, good morning. Just on the, I guess the commentary you had around the Montreal vacancy, I guess based on the activity you're seeing today, how much downtime could we see there at the moment?
Yeah, we added in our 2026 budget for six months of downtime. They left July 31st. I was on site that week. Nice clean building they left for us. It just really depends. We had an unsolicited offer for the asset earlier in the year. It didn't go anywhere. We're happy to lease it to a single tenant, but probably the best case would be demising it. There's a natural law that you could make two tenants and probably three. We may do some demising, that type of thing. That takes time, and it just depends on the market. It's quiet now for larger square footages. As we come into September, we'll see. Zach, you can maybe comment on some of the people that have been through and whatnot.
Yeah, sure. Just as Gordy noted, and not much of a real surprise, for users above 100,000 sq ft, it just remains generally quiet overall on new tenant activity at that size range. When you start talking about users around 50,000± sq ft , there's still a healthy amount of activity in the market overall and in the South Shore as well. When we look at the property and we're doing kind of a feasibility study now about demising it into units that kind of approach that 50,000 sq ft mark, we start to see a little bit more kicks at the can in terms of tenant interest.
Nothing significant or no paper today, but I think when we can start talking about those size ranges to the market and being able to offer that size, I think we'll start to get a little bit more traction there, especially as the summer comes to an end and people are a little bit more in their seat, come September.
Okay. If you are going down potentially the path of re-demising, do you have a budget in mind on what sort of the cost would be for releasing?
High level, we've got a CAD 2 million number as a bogey. It just depends on the tenant. That would include four to six more doors in one of the ends of the building. That would be the higher end of it, we think, but yet to be determined. If it's a simpler user or a different setup than three tenants, it'd be less than that. You just have to keep it in the context that we paid CAD 56 a square foot for the building, CAD 10 million. It'd be worth north of CAD 20 million fully leased at market. We have a little bit of room to play on this asset.
Yep. Just looking at the balance of your lease expires this year and early next, anything else that you would expect to get back in terms of a vacancy, materially of note anyways?
Of significance? No, not really as of right now. We're trending quite well on, obviously, our remaining 25 expires. I think we have about 400,000 sq ft left, and this one building of 175,000 sq ft makes up a good chunk of that remaining space. We have a few medium-sized spaces in that 25 list remaining, but feel pretty confident about those and looking positive and looking into 2026 as well, where we're over 50% renewed there. On some of the big expires, we've already started to have some upfront conversations, which kind of look positive. As of right now, nothing else too major.
Sounds good. I'll turn it back. Thanks a lot.
Thanks, Brad.
Thank you. The next question comes from Kyle Stanley with Desjardins. Please go ahead.
Thanks. Good morning, everyone.
Morning.
Just sticking with the Québec asset, was there any termination income associated? I think you'd said earlier in the year that there was like a short-term lease extension on the property. I'm just curious if there's anything to bake in there.
Yeah, no, that was an interesting dance. I mean, the lease was up in May. They asked for, was it the first time you got a 13-month extension?
Yep.
You know, we gave them paper on the 13-month extension. That's why we figured we'd have it into 2026. All of a sudden, it became a two-month extension. No termination income, anything like that. For Q2, this property won't really affect Q2. We'll have one month of CAD 10 rent versus the CAD 450 rent we used to get, which almost covers off that quarter. Q4, you'll notice it. We're hoping we don't notice it from a standpoint that we see so much of the cash flow growth. When we look at our modeling for Q4, you might not notice it, but it'd be about CAD 300,000 a quarter would be the delta of in place versus vacant. No termination income, nothing of that sort.
Okay. Thank you for that. Just on the retail portfolio disposition, can you disclose, you know, cap rate? You've, I think, highlighted a Q3 close. I'm just curious. It's probably safe to assume mid-quarter on that. Lastly, you know, not looking for the exact buyer, but just looking at the type of buyer that would be interested in the portfolio. Do you see that type of buyer remaining active for these types of spaces? As you obviously, you're approaching the end of your transition, but there's still some, you know, some wood to chop there.
Yeah. First of all, I just want to say one thing about this transition. We're not going to get into this dance like some other REITs, whether you're 92%, 93%, 94%, 95% cash flow. Our GLAl is to get above 90%. We're an industrial REIT as of that. That's the difference in this transition for us. We're done from that standpoint. We will have great grocery-anchored retail left. It's financed through our line, which makes it a little more difficult to sell. That's really the thing for us. We're kind of done this dance. We're not going to change our name, I don't think, to an industrial REIT. Don't think we have to. If people are waiting for us to get to 99.9%, it probably won't happen. We're kind of done that.
Interestingly enough, for everybody on the call, as we know, Choice Retail REIT only has 72% of its cash flow from retail. This kind of 90%- 100% thing, it's a little silly for us. I'll turn it over to Zach just on the buyer and the capitalization rate and stuff like that.
Yeah, sure. Happy to provide some color. I think it's disclosed, but the purchase price is CAD 39.75 million, which on a year-one NOI basis would kind of reflect approximately an 8.1% cap rate, going in for the buyer. These six assets were actually taken to market on both a portfolio and individual basis. We got bids on individual assets, and then we had this portfolio bid as well, which made the most sense at the end of the day. The buyer, I can only describe them as a local private sophisticated investor, a local group who already owns CAD 50+ million of assets in their portfolio. They're sophisticated. They have a bit of a platform, and they like and enjoy these markets and see the upside in these assets. Overall, I feel pretty good about the buyer, pretty good about the sale.
When you look at the remaining stuff of our portfolio, as Gordy said, we're not keen and too focused on selling more after what we have on the docket right now. This buyer is definitely a candidate to be a repeat customer. Based on the individual bids we've got from other potential buyers, I think there's no question that with the remaining assets being essentially [Chobee's] grocery store, either standalone or anchored strips, we'd see pretty good liquidity for those assets, if need be.
Just to add to that, the 8.1%, that's on the in-place NOI. We did have some capital adjustments there for some roof work and whatnot, so it'd be a little bit more north of 8.1% if you adjusted for that. If you break that down, there's only one Sobey strip in there. The 8.1% is kind of affected by good standalone buildings, but not grocery anchored per se, which would drive a lower cap rate in and of itself than the 8.1%.
Okay. No, thank you for that. I won't be on the lookout for a PRO Industrial REIT name change. Just last one for me. Obviously, you've been very successful on the leasing front. I'm curious, do you believe there's still a lot of tenant demand that is sitting on the sidelines in your markets waiting for more certainty? Or would you say that, you know, the trade uncertainties and economic outlook have a little bit less of an impact on the activity in maybe Halifax, Winnipeg, and Ottawa?
Yeah, it's a fair question. I think when you're talking about true small bay tenants, you know, give or take 5,000 sq ft, I don't think there's too much sitting on the sideline behavior for those groups, just given that they're generally more local and regional focused. The tariff business is a little less sensitive for them. Plus, every day these are already tenants who are, you know, working on trying to grow and expand their base. Another contract could have them need another 2,000 sq ft of space overnight. I don't think those types of tenants are really sitting on the sideline. I think, you know, in our core markets and our secondary markets, when you start to talk about tenants in the 20, 30, 40, 50,000 sq ft range and plus, I think those tenants are the ones still sitting on the sideline.
It's the group who has 25,000 sq ft and is maybe thinking of doubling in size to 50,000, they probably feel a little less certain of where the world is heading right now and are kind of waiting for things to settle. I think it's just as you get higher up in that size range, that's just where you see the uncertainty. When you go into 100,000+ sq ft pretty much across Canada, I think that's ultimately why you're seeing just a general slowdown is those groups, those 3PLs, those national companies are the ones most sensitive to all of this. In our core markets that are kind of standard small bay range, we're not really seeing too much of that. We're still seeing a pretty healthy load of activities.
Okay. Thank you for that. Very clear. I'll turn it back.
Thank you. The next question comes from Sam Damiani with TD Cowen. Please go ahead.
Thank you. Good morning, everyone. I guess maybe just with the Parkit acquisition now, sort of three weeks or so behind, are you seeing anything different versus your expectations on those assets? I know it's early days, but just curious. Thank you.
No, I mean, we really liked those assets. You know, on paper we liked them, and then when we went to look at them at - 39 in February in Winnipeg, they were nice as well. No, they're performing as expected. I think we underwrote maybe a 20,000 sq ft vacancy in one mid-bay piece, but with low rent. So, may have to deal with that towards the end of the year. Other than that, it's performing well. The next question is, would you do more? I mean, that was a concept. We're going to look at that. You know, there are assets in our locations. There's still one asset left in Winnipeg that was a leasing issue at the time of the deal. That could be available to us. They've got some nice Ottawa assets. They've got a couple of assets north of Laval.
You know, and then Burlington, they've got some mid-bay industrial as well. Just as of yesterday, with one of our, the Chair of Parkit on our board now, said that now that we got through the quarter, we'd have a look at if there's something else we could do. I think they're pleased with the transaction and as are we. We may get a little bit more done there in the next little while.
That's great. Helpful. Thank you. Just one more for me, the focus on secondary markets and these three in particular, Halifax, Ottawa, Winnipeg. How long is that going to be the focus for PROREIT and what would be the next sort of geographical focus beyond that and when might that happen?
Yeah, I mean, we're just simple folks. We buy real estate around our platforms and that's worked well for us for quite a while. We're selling some New Brunswick assets now, some retail there, which you guys will figure out soon enough. We could buy a little bit more in Moncton kind of free, if you will, because we already have the management there. Ottawa is a great area for us, an hour and a half from our head office here. That's a focus. Winnipeg, we have 1.2 million sq ft. We have a nice story in Halifax with 3.1 million sq ft and kind of have pretty good control of the market. We're just looking that way. Alberta always becomes the question for us. Back in the Kenmark days, we owned assets in Alberta and we're fine with them.
It's just when we look at the low-hanging fruit, we'd just rather be focused on some of these areas that we're already in rather than setting up a full shop in whether it's Calgary or Edmonton. Zach knows if we were to buy anything significant there, he'd have to stay out there for two months and understand every note. That's really the thing that would get us there. A couple hundred million in assets, you wouldn't probably see us buying a one-off asset, Alberta, that type of thing.
Zach, you're not itching to spend a couple months out in Alberta?
I don't know. I enjoy my few trips every now and then to Calgary and Edmonton. I have met a lot of the brokerage community out there. You know, those markets pose some really interesting potential opportunities just from the population growth and such. When we think of our East Coast markets and knowing these markets super well, knowing the brokerage community and really understanding the nuances of the right nodes, the small bay, the mid-bay, and that such, we just feel that we have such an advantage sticking closer to our home base. Obviously, Montreal, we don't talk about it almost as a core market, but it's still a market where we have over 500,000 sq ft in Greater Montreal. As Gordon has spoken about previously, Quebec City is a natural extension of that. We've looked at opportunities there and we'll continue to look there.
An easy next step is the secondary market in Quebec to also look at attractively. No, definitely keen to continue growing on our platforms.
Excellent. Thank you. I'll turn it back.
Thank you.
Thank you.
There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Thanks, everybody.