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Edited Transcript of BTB.UN.TO earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 BTB Real Estate Investment Trust Earnings Call

Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of BTB Real Estate Investment Trust earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benoît Cyr

BTB Real Estate Investment Trust - VP, CFO & Assistant Secretary

* Michel Léonard

BTB Real Estate Investment Trust - President, CEO & Trustee

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Conference Call Participants

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* Stephan Boire

Echelon Wealth Partners Inc., Research Division - Analyst

* Yashwant Sankpal

Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust

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Presentation

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Operator [1]

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Good morning. My name is Jessica, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust's 2019 Second Quarter Ended June 30, 2019 Financial Results Conference Call. (Operator Instructions)

Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of BTB Real Estate Investment Trust to be materially different from those expressed or implied by such forward-looking statements. The risks, uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust's management discussion and analysis of financial results and in its Annual Information Form, which were filed on SEDAR and on BTB's website at www.btbreit.com.

I would like to remind everyone that this conference is being recorded. Thank you.

And I will now turn the conference over to Mr. Michel Léonard, President and Chief Executive Officer; and Mr. Benoît Cyr, Vice President and Chief Financial Officer. Mr. Léonard, you may begin your conference.

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [2]

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Thank you. Good morning, and welcome to our conference call for the quarter ended June 30, 2019. The first point of interest is the fact that our committed occupancy rate is up 3% to 93% and our in-place rate is almost 90%. That is a testimony to the great effort that's been deployed by our leasing team. More than 200,000 square feet are firmly leased and committed for future occupancy. And as of the third quarter of 2019, we will generate additional income that we will expand upon, and specifically generated by the new lease with Nuera that's replacing Pharmetics. And as of July 1, I'm pleased to report that we'll no longer speak about the bankruptcy of Pharmetics.

Important prospects that we have for our Sainte-Catherine and Crescent Street property when -- you remember, when we purchased this property, the occupancy rate was 20%; we now stand at 57%. And we're getting great traction for the remainder of the ground floor space that we anticipate will generate net revenues of approximately $422,000 and the prospect -- the very serious prospect that we have right now would be taking occupancy in July 2020.

Our property in Brewer Hunt that's properly -- that's currently occupy approximately 50%. And we are concluding a 35,000 -- 32,000 square foot office transaction and that will [propult] us over 90% of occupancy. And this transaction has not been recorded and the committed for June 30 as it's not been -- the lease has not been signed. We saw a significant increase in our average rental rate for renewed leases by 7%. It was 5.6% on the first quarter of 2019 and an average of 5.6% from the beginning of this year.

We have already started to tackle lease renewals for 2020 and 2021. As you saw our percentage of lease expirations for 2020 and 2021 go down, mainly 2021, that was north of 20% to currently at 16%. The same property NOI increased by 4.6% in rental income, 4.8% in net operating income and 7.4% in property income -- in net property income. There's been a significant decrease in our mortgage debt ratio from 56% to 54.9%, and we have some firepower to deploy for future acquisitions.

Certain key performance indicators showing strong signs of improvement, especially caused by our recent acquisitions. And we own less properties right now in terms of numbers but we carry more square footage. We used to be at 5.3 million square feet and now we're at 5.7 million square feet.

We did report a surprise, which is the bankruptcy of Ashley Furniture. They leased 34,000 square feet from us at 1939 F X Sabourin Street in St-Hubert. This property is well located, prominent on Highway 30, and we should attract great tenants. The impact of this property on our results for 2019 would be approximately $210,000.

We did acquisitions and dispositions since the beginning of the year. We did report that we sold the Antonio Barbeau property for $7.1 million. We had purchased that property for $4 million. And in the previous quarter, we did report that we had sold 2 Georges Gagné properties, 1 is strip mall and the other 1 a retail condo. And our disposition efforts are almost completed. We have 3 remaining properties for sale, Harvey, Henri-Bourassa and the Méga property. So we don't anticipate selling other properties in 2019 unless it's opportunistic.

The acquisitions that we did report, we did acquire a 65,000 square foot industrial property in St-Laurent, a borough of Montréal, for $11.9 million. We acquired 2 properties located on the South Shore, 1 in Saint-Bruno, anchored by Walmart, and the other a retail office complex in Saint-Hilaire for a total consideration of $62.2 million (sic) [$62.6 million].

The status of our strategic plan, as I mentioned, we disposed of 11 properties. These dispositions, as Benoît will report, did create a shortfall, hence our higher than 100% ratios on AFFO and FFO. And the acquisitions of 7 properties created income of $2.9 million, where the disposition created a shortfall of $2 million, and we're seeing a net effect of $900,000. Hence the increase in our rental income by 7.9%, this is a very positive sign showing that we believe that we've turned the corner.

With this, I'd like to ask Benoît to go into the details of results for Q2 2019.

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Benoît Cyr, BTB Real Estate Investment Trust - VP, CFO & Assistant Secretary [3]

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Thank you, Michel. Good morning, everyone. Michel spoke about the disposition of Antonio-Barbeau and the 3 acquisitions we did during the quarter. Total purchase price for these 3 buildings, $76.5 million. We put financing -- 3 financings on these acquisitions for $48.7 million. We estimate the 3 acquisitions will provide a yearly NOI of about $5.4 million.

To provide the equity portion of these acquisitions, we have issued on June 14, 6.2 million units at a price of $4.67 for net proceeds of $27 million. A portion of $6 million was used to partially reimburse our acquisition line of credit and if so available for future acquisitions.

At the end of June, our portfolio consisted of 67 properties representing over 5.7 million square feet and having a market value of approximately $889 million.

For discussion of our financial results in details, I would like to pass through some evidence and factors that occurred recently and have affected the second quarter's earnings.

First, our committed occupancy rate increased by 3% for the last year -- from the last year and is now at 93.1%. The in-place occupancy rate was at 89.5% at the end of June and is today around 92.2%. Over 150,000 square feet are now fully occupied and generate revenues. We expect $525,000 of additional revenues in Q3 or close to $0.01 per unit.

Second, our mortgage debt ratio was reduced from 56% to 54.9% during 2018. As we were selling some properties, we prepaid some mortgage loans and so financial leverage is now available to redeploy capital to be used to purchase accretive properties.

Third, bankruptcy of Pharmetics that generated a shortfall of revenues and additional cost totaling approximately $275,000 per quarter is now behind us, as mentioned. Nuera Enterprise is in full occupancy since July 1 and is now paying rent.

Fourth, the Shire space in the St. Lawrence Technoparc, for which we received a cancellation penalty last year and some retail and office spaces in our head office building on Crescent Street are still vacant, but they are both experiencing good traction, and we expect to resolve the situation over the next quarters and generate soon additional revenues.

That being said, for the quarter, rental revenues were up 7.9% or $1.6 million compared to the same in 2018. Purchased properties in the last 12 months generated approximately $2.9 million of additional revenues, and the 11 disposed properties generated an estimated shortfall of $2 million.

We've recorded an increase in our operating expenses of 6.9% or $0.7 million between the second quarter of last year and this second quarter, mostly due to the effect of acquisitions and dispositions completed during the last quarters.

Our NOI is down 8.7% from -- for the quarter compared to the same -- is up, sorry, compared to the same in 2018 and is at 40 -- 54.4% as percentage of revenues. Acquisitions completed during the last 4 quarters contribute to an increase in NOI of $1.7 million, while the shortfall from disposal completed during the same period is estimated at $1.1 million.

Financial expenses are up from $5.3 million to $6.8 million. We've accounted a fair value adjustment of a total of $700,000 of our swap and on Class B LP units at the end of June. This adjustment of value is recorded as an increase of financial expenses and is due to lower interest rates in Canada and to the increase in value of our LP units. This noncash item explains most part of the financial expense increase.

Our average weighted contractual rate of interest on mortgage loans is now at 3.93%, 11 basis points higher as at the end of Q2 '18, but down 4 points since the end of Q1 '19. The weighted average term of our mortgage portfolio is 5 years and 4 months.

Our Trust administrative expenses are at $1.5 million, up approximately $370,000 from last year, mostly due to the bad debt expense following the bankruptcy of an Ashley Furniture stores in one of our buildings.

To appraise our portfolio, at the end of each quarter, we use the cap rate provided by external evaluators. We have estimated that the value of our -- of the real estate portfolio recorded in the balance sheet at the end of June adequately represented its fair market value and that no material adjustment was required. The weighted average cap rate of the entire portfolio is at 6.8% at the end of June compared to 7% -- 7.0% a year ago.

We present the net income of $3.3 million for the quarter, $0.058 per unit compared to $4.6 million in Q2 '18 or $0.093 per unit. On an adjusted basis, before volatile nonmonetary items, the net income is at $4 million compared to $4.3 million a year ago. The same property portfolio for the quarter shows an increase of 4.6% of its revenues, an increase of 4.8% in its NOI and an increase of 7.4% in its net property income after financial expenses.

Question came earlier this morning by e-mail from you guys to get some details about the revenue and NOI increases in the same property portfolio.

First, the increase in the average rental rate of 7%, especially in the office sector. Second, the increase in our occupancy rate. And third, some special situation: first the 1001 Sherbrooke Street in Montréal, where the Englobe, engineer firm and (inaudible), 2 new tenants, both started their full occupancy in Q3 of last year, and so generated the revenues in Q2 '19, and there was no revenue for these spaces last year. The increase in revenue and NOI is about $200,000 for the quarter in this building.

Same situation on Aberdeen Street in Ottawa, a new tenant brings about $150,000 of new revenues and NOI for the quarter. And on Boundary in Cornwall, Ontario, 2 new tenants bring over $100,000 of revenue -- new revenues and NOI. So that explains that -- that are some situations that explains the good performance of our same property portfolio. And due to additional revenues coming from committed lease space in Q3 and Q4, we expect the same property portfolio indicators to continue to show positive results.

Our distributions increased from $5.4 million in Q2 '18 to $6.1 million in Q2 '19, and it includes 12.8% of our distributions in unit under our DRIP. Our distributable income from the quarter -- for the quarter amounted $5.6 million or $0.097 per unit compared to $5.5 million and $0.111 per unit in Q2 '18. Our distribution payout ratio for the quarter stood at 108% from 95% last year. Due to additional revenues coming in the next quarters, we expect the distributable income, the FFO and the AFFO payout ratios to be under 100% by the end of the year. Our recurring FFO reached approximately $5.4 million for the quarter compared to $5.3 million last year, $0.095 per unit this year compared to $0.106 last year. And finally, our recurring AFFO amounted $4.9 million, same as in Q2 '18, $0.085 per unit this year compared to $0.099 last year.

Our balance sheet presents investment properties at market -- at fair market value amounting $889 million compared to $839 million last December and $778 million in June '18. We had $1.3 million in cash, $3.5 million in receivables, a balance of sales receivable of $6 million at an interest rate of 7%, and other assets amounted $8.7 million, mostly prepaid expenses.

We spent approximately $1.3 million in recoverable and nonrecoverable CapEx during the quarter. And we spent $1.4 million in TIs to meet the specific needs of our clients as well as commissions to brokers.

Mortgage loans payable amounted $498 million at the end of June and were at $471 million in last December and $428 million last year. Our mortgage loan-to-value ratio is now at -- as mentioned, at 54.9% compared to 55.8% in last December and 56.0% in June 2018. We have 2 series of debenture outstanding for a net book value of $49.7 million. The Series E is now redeemable at their principal amount and they both -- and the Series E mature only in March 2020. At the end of June, we were using $10.2 million of our credit acquisition for this line and $600,000 on our operation line. We had the $25 million of mortgage loans coming to maturity in the rest of 2019. All loans are under -- already under discussions with lender to be renewed or refinanced.

That's all for my section. I would like to thank you for your attention and now turn back the conference to the facilitator for questions from analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Stephan Boire of Echelon Wealth Partners.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [2]

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I just had a -- I just wanted to get back to the Ashley Furniture situation. At the risk, I guess, of sounding annoying by switching from Pharmetics to Ashley, I just wanted to know, has there been a date established yet on when the store is going to close? And will there be any penalties to be paid, or how is this going to work?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [3]

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The store is scheduled to close on September 30. And we don't -- we've done the full write-off, so we don't anticipate receiving any proceeds from the trustee, although we are -- we made the necessary claims to the trustee. So if we receive funds from the trustee, then obviously it will be a reverse entry for the booking that we did make or the provision that we did take. So -- but we don't -- at this point, we'd rather do a total write-off then anticipate something that is not going to come later.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [4]

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Right. Being more conservative, that makes sense. And how is this going to affect the same-store NOI growth going forward? Or do you still expect the NOI growth to be positive even considering that -- the situation with Ashley?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [5]

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The answer is, yes.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [6]

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Okay. And just quickly on AFFO payouts. I know it was discussed -- and sorry if I make you repeat, but was it mentioned that you expect the payout to be under 100% by the end of the year? Or was it FFO payout?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [7]

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All payout ratios will be under 100%, trending towards 100% in Q3 and definitely under 100% in Q4.

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Operator [8]

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Your next question comes from Yash Sankpal of Laurentian Bank.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [9]

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Congratulations on a good quarter. The leasing momentum you're seeing, other than your efforts, what else do you attribute that to?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [10]

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I think that the economy in Québec is doing very well. And overall, we've seen a reduction of available spaces throughout the markets where we are involved. We've disposed the properties that were located in smaller markets, hence more difficult to lease. And we -- the properties that we did sell carried a higher vacancy factor than the properties that we are keeping or the properties that we did acquire. So as a result, we are trending positively. And I think that the momentum that we got in the sales process, I think that we timed our sales very well as far as acceptance to the market because we sold our properties mostly at a profit. And -- so the timing of it was good. But as you could see, the redeployment of capital was more difficult and it did affect our numbers. So we disposed the properties. We had timing problems in acquiring other properties. So obviously, our numbers were affected by that. We reduced our debt and then redeployed the capital concurrently with the debt reduction. And I remind you that our overall debt ratio over 2 years and a bit ago was roughly 71% or 72%. So a lot of factors that have basically affected our results that are, as Benoît mentioned, behind us as a result of we did redeploy capital, we did lease our properties, and the increase of 3% is -- yes, it is substantial. We did work hard, but I strongly believe that we are now dealing with a much better portfolio than we had 2 years ago. And as a result, I think that our properties are more desirable and better located, hence our success.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [11]

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That's good color. Where do you expect your occupancy to be by year-end, by December 31?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [12]

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We don't believe that it's going to be lower than what we've reported in this quarter.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [13]

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So at least 93%?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [14]

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Correct. And Benoît mentioned, the committed versus the in-place current rate, we are close to 90% of in-place and the in-place has already gone up to...

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Benoît Cyr, BTB Real Estate Investment Trust - VP, CFO & Assistant Secretary [15]

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92.2%.

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [16]

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92.2%. So hence the positive forecast that we did mention regarding our ratios as a result of these tenants being in occupancy and paying rent.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Analyst of Real Estate Investment Trust [17]

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All right. That's good. You said your G&A was inflated because of the bad debt expense. So what would be a run rate -- good run rate going forward?

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Benoît Cyr, BTB Real Estate Investment Trust - VP, CFO & Assistant Secretary [18]

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We'd say about $1.2 million acquired.

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Operator [19]

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(Operator Instructions) There are no further questions at this time. Please proceed.

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [20]

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Well, thank you very much for attending this morning. As you saw or heard, our same property portfolio shows amazing results. And the trend is to report positive results for -- towards the year's end. Benoît has made the forecast, which is rare for Benoît to commit to a forecast. But as you heard, our payout ratios are going to trend to be below 100% and below 100% for Q4 2019. We saw our occupancy rate increase substantially and trending towards maintaining the same rate towards the end of the year, even considering the Ashley Furniture bankruptcy. So it is -- I have to tell you and I'll be quite direct in the sense that when I embarked on the process of disposition or rightsizing the portfolio or getting rid of certain properties that did not fare well within our portfolio, I sincerely did not anticipate that our numbers would be affected that drastically throughout the process. And unfortunately, it was. But at this point, the turnaround is definitely well engaged, and we are positively looking at our future in the sense that the bad reporting has been -- is behind us and we're very pleased with it.

So we thank you very much for your patience. I know a lot of noise throughout the last 3 quarters, I would say, a lot of noise, but I think that BTB is more than better positioned in order to assume its responsibilities for the future. So again, thank you very much.

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Operator [21]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.