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Edited Transcript of BTB.UN.TO earnings conference call or presentation 13-Nov-19 3:00pm GMT

Q3 2019 BTB Real Estate Investment Trust Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of BTB Real Estate Investment Trust earnings conference call or presentation Wednesday, November 13, 2019 at 3:00:00pm 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 - Real Estate Investment Trust Analyst

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Presentation

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Operator [1]

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Good morning. My name is Sylvie, 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 Third Quarter ended September 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 analysts -- 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 call is being recorded. Thank you.

I now would like to turn the conference over to Mr. Michel Léonard, President and Chief Executive Officer; and Mr. Benoît Cyr, Vice President and Chief Financial Officer. Please go ahead, gentlemen.

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

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Thank you very much. Thank you for being present in our call today. This is indeed a solid quarter for BTB. You saw our committed occupancy is up by 3.9% to 93.6%, which is a record high for BTB for the last 10 years. In-place is 92.2% generated by a great effort from our leasing team. The difference between our in-place and our committed is shrinking as of this quarter compared to the last quarter and it is now 1.4%. More than 78,000 square feet are firmly leased and committed for future occupancy. And as of the fourth quarter of 2019 and the first quarter of 2020, they will generate additional income, specifically related to the conclusion of the lease with these tenants. And including at Brewer Hunt in Ottawa, Satcom committed to 32,000 square feet, presently are under construction of their premises. And we're also pleased to announce that we have leased to Telus 2,400 square feet on the ground floor of our Ste-Catherine property for a term of 10 years. Telus is already on Ste-Catherine Street and moving to our premises in the middle of next year.

This -- the biggest occupancy rate, the increase came from our office segment, where we saw a 4% increase in occupancy. This is showing a strong organic growth. Significant increase in average rental rate of renewed leases by 5.3% and -- for the quarter and 6.4% since January 1 of this year. We renewed more than 369,000 square feet of leases, including 95,000 square feet of leasing that are -- leases that are maturing over the coming years. For the quarter, our rental income was up by 5.7%, net operating income increased by 10.1%, same-property portfolio increased by 16.5%. And for the year-to-date, the rental income was up by 3.1%, net operating income increased by 3.3% and the same-property portfolio increased by 5.7%, as they were impacted by the first quarter results that were negative.

As forecasted during our last call, our FFO is now below 100% at 97.2%. This is an important turnaround after 3 quarters where it was above 100%. Our AFFO is trending down, witnessing a positive momentum. Again, we are showing a decrease in the trust mortgage debt ratio to 55%. No adjustment to fair market value of our properties were recorded in order to see this lowering of our debt ratio.

If we compare certain metrics, by excluding the effects of these -- the buyout for Shire that occurred in the third quarter of 2018, our rental income would have been up by 10.9% for the quarter and 6.3% since January 1, 2019. Net operating income would have increased by 13.7% for the quarter. AFO -- AFFO were -- would be flat compared to 2018.

Our report on Ashley Furniture. They left their premises on November 1, 2019. As you know, they leased 34,000 square feet in our property located in St-Hubert. This property is well-located, very prominent on Highway 30. And right now, we have great interest in leasing. So hopefully, by our next conference call, we will report that this property has been leased.

Regarding our property acquisition and dispositions, regarding our strategic plan review. You saw we disposed the Harvey property. Our disposition program is almost completed. We have 2 remaining properties for sale at the present time, which is the Henri-Bourassa property and the Magog property. We haven't concluded acquisitions during the quarter.

So the total, we disposed of 11 properties. These dispositions created a shortfall of $2.1 million, where the acquisition of the 5 properties between October 2019 and September -- sorry, October 2018 and September 2019 created an income of $3.1 million, thereby seeing a net effect of $1 million. Hence, the increase in rental income by 3.8%, again a positive sign showing that we're turning the corner.

We did issue debentures to redeem the series that was maturing in March 2020 to ensure that there would be no overhang on our stock. Given that the level of our AFFO was above 100% at that time and still 100% as of September 30th, we did not deem it advisable to issue equity to redeem the debentures as it would adversely affect our results.

We did look at issuing equity. But unfortunately, it would not have been accretive at that time. So with this, I would like to turn the mic to Benoît, who will delve into the details of our third quarter.

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

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Thank you. Good morning, everyone. As mentioned during this third quarter, we disposed 1 property located on Harvey Boulevard in Jonquière for a selling price of $4.4 million. At the end of September, our portfolio consisted of 66 properties, representing over 5.7 million square feet of rentable area and having a market value of approximately $887 million.

Before discussing our financial results in detail, I would like to pass through some highlights of the third quarter. First, our committed occupancy rate increased by 3.9% from last year and 2.6% from last December and is now at 93.6%. As mentioned, it includes 78,000 square feet leased for occupancy over the next few months to Satcom on our -- in our Brewer Hunt property in Ottawa and in Complexe Lebourgneuf - Phase I in Québec city. And the in-place occupancy rate is at 92.2% at the end of September from 89.1% at the end of Q3 of last year.

Second, our mortgage rate ratio declined from 56.2% to 55% during 2018 and 2019 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, as expected, the recurring distributable income and the recurring FFO payout ratios are now below 100%. And the events that brought these ratios above 100% have now been mostly resolved. Finally, the same-property portfolio continue to give largely positive results. It's NOI showed an increase of 10.1% in Q3 '19 compared to the same in '18. That being said, for the quarter, rental revenues were up 3.8% or $875,000 compared to the same last year. If we exclude the nonrecurring item from the $1.5 million lease cancellation penalty recorded in 2018, rental income showed an increase of $2.4 million or 10.9%.

Purchased properties in the last 12 months, generated approximately $3.1 million of additional revenues as the 11 disposed properties generated an estimated shortfall of $2.1 million. We recorded an increase in our operating expenses of 7.5% or $0.7 million between the 2 quarter of '18 and -- the third quarter of '18 and the third quarter of '19, mostly due to the effect of acquisitions and dispositions completed during the last 12 months.

Our NOI is up 1.1% for the quarter compared to the same in 2018 and is at 56.2% as a percentage of revenues. Acquisitions completed during the last 4 quarters, contributed to an increase in NOI of $1.9 million, while the shortfall from disposal completed during the same period is estimated at $1.3 million. Excluding the nonrecurring item from the lease cancellation penalty, NOI would show an increase of $1.6 million or 13.7%.

Total financial expenses are up from $5 million to $6.3 million. We accounted a fair value adjustment on our swaps and on the Class B LP units, resulting in a revenue of $0.9 million in Q3 '18, while we've accounted an expense of $100,000 in Q3 '19. These adjustments of value are recorded following changes in interest rates in Canada from a period to the other.

Our average weighted contractual rate of interest on mortgage loans is now at 3.92%, 3 basis points higher as at the end of Q3 last year. And the weighted average term of our mortgage loan portfolio is now 5 years and 1 month.

Our trust administration expenses are at $1.4 million, up approximately $200,000 from last year, and it's mostly due to the bad debt expense and unit-based compensation increases. To appraise our portfolio at the end of each quarter, we use the cap rates provided by external evaluators. We have estimated that the value of the real estate portfolio recorded in the balance sheet as of the end of September adequately represented its fair market value and that no material adjustment was required. The weighted average cap rate of the entire portfolio is at 6.79% at the end of September '19 compared to 6.91% a year ago. We present a net income of $5.6 million for the quarter, $0.09 per unit compared to $5.8 million in Q3 '18 or $0.104 per unit. On an adjusted basis before a volatile nonmonetary items and nonrecurring items, the net income is at $5.8 million or $0.093 this year compared to $4.3 million or $0.085 a year ago. The same-property portfolio for the quarter shows an increase of 5.7% of its revenues, an increase of 10.1% of its NOI and an increase of 16.5% in its net property income after financial expenses.

Due to additional revenues coming from committed lease space in Q4, we expect the same-property portfolio indicators to continue to show positive results in Q4 '19 and in the beginning of 2020. Our distributions increased from $5.8 million in Q3 '18 to $6.6 million in Q3 '19, including a 13.0% of our distributions in units under our DRIP.

Our recurring distributable income for the quarter amounted $6.8 million or $0.109 per unit compared to $6.0 million and $0.108 last year. Our distribution payout ratio for the quarter stood at 96.8% from 97.3% last year and from above 100% in the last 3 quarters. We expect the distributable income payout ratio to stay under 100% for the last quarter of '19. Our recurring FFO reached approximately $6.8 million for the quarter compared to $6.0 million for Q3 '18, $0.108 this year compared to $0.109 last year.

Finally, our recurring AFFO amounted to $6.1 million compared to $5.4 million last year, $0.097 per unit for this quarter and the same for last year. Our provision for nonrecoverable CapEx in the AFFO calculation in the last 9 months is higher as real CapEx incurred in the same period.

Our balance sheet presents investment properties at fair market value amounting to $887 million compared to $839 million last December and $819 million in last September -- September of last year. We had $1.8 million in cash, $3.8 million in receivables. The balance of sales receivable of $6 million at an interest rate of 7%, and other assets amounted $7 million, mostly prepaid expenses.

We spent approximately $1.2 million in recoverable and nonrecoverable CapEx during the quarter. Also, we spent over $1.1 million in TIs to meet the specific needs of our clients as well as commission to brokers.

Mortgage loans payable amounted $495 million at the end of September. And we're at $471 million in last December and $468 million last year. Our mortgage loan-to-value ratio is now at 55.0% compared to 55.8% in last December and 56.3% last year.

On December 30, we have the 2 series of debenture outstanding for a net book value of $49.1 million. As mentioned, the Series E have been redeemed on November 1 at their principal amounts. Following the issuance of a new series, the Series G for $24 million at an interest rate of 6.0%. And this new series will mature in October 24. At the end of September, we were using $10.2 million on our acquisition line of credit and $2.4 million on our operation line. We had $18 million of mortgage loans coming to maturity for the rest of '19, all these loans are already under discussions with lenders to be renewed or refinanced in the coming weeks.

That's all for my section. I'd 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) And your first question will be from Stephan Boire at Echelon Wealth Partners.

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

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So I was just wondering, could you just remind me what is your target debt to GBV at the end of next year?

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

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At the end of next year or at the end of this year?

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

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Of 2020?

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

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Okay. The -- so you're talking about the total debt. And so there's a series of debenture that comes to maturity on December 31, 2020. And that represents roughly 3% of the total debt ratio. So if we decide to redeem that debenture in equity, then obviously, we're going to see the rate go down by 3%. If we decide to reissue debentures in order to redeem it, then it's going to remain stable. So the other element to this is our mortgage debt ratio that is sitting at 55%. So do we see a reduction in our debt ratio, it's -- I think that is going to remain stable. So the only issue regarding our total debt is going to be the redemption of debentures, either by way of equity or by way of debentures. So if it's -- again, if it's done by way of equity, then we're going to see a 3% effect on the total debt ratio, thereby bringing it down to less than 60%. I would say that if the market is favorable for BTB in the course of 2020 and given that our long-term view that, as Benoît mentioned during the last call, that we do see our FFO and AFFO to be lower than 100%. That would create the impetus necessary for us to issue equity in order to redeem the debenture. But our target, our goal is to keep our ratio, FFO and AFFO, below 100%, and we wouldn't want to prejudice that target.

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

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Okay. It makes a lot of sense. And in the -- in regards to the same-property NOI, I was wondering if you could give more color on the sectoral basis -- on a sectoral basis? Or where do you see -- where did you see the most significant improvements over the quarter? Or is it only related to the Pharmetics space. I'm talking about on a year-over-year basis?

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

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Well, obviously, Pharmetics wasn't an issue, because it was part of our same-property NOI and it represented a good chunk of it. There's -- the other item that comes to fruition is the fact that we've increased our occupancy rate in our office properties by 4%. And increasing the occupancy rate in office properties is -- goes right to the bottom line of the business and has the strongest contribution to the bottom line. If you compare it to, say, retail or you're comparing it to industrial, industrial would contribute less than retail than office. So -- and we still have a lot of activity within our office portfolio, and we see that between now and the end of the year, we're still going to be able to increase our occupancy rate in our office portfolio. So -- and given that, I think that creates the impetus for the same-property NOI to increase and to maintain itself above water, so remained itself on the positive front.

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Stephan Boire, Echelon Wealth Partners Inc., Research Division - Analyst [8]

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Right. That's very interesting. And in that sense, I guess, can you give us some color on the -- in terms of same-property NOI for next year, maybe for Q4 and for next year, what's your target?

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [9]

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As Benoît mentioned, we certainly believe that Q4 is going to be as positive as Q3. We haven't completed our budget yet. We're almost -- almost have completed our budget. So we just have to meet the different people responsible for their leasing, lease renewals and so on, in order to answer your question for 2020. So I don't have the answer at hand right now because our budgets are not complete as far as that is concerned, but it will be completed very soon, so I'll have more clarity as soon as to what's going to transpire in 2020. But in 2020, if we look at our lease expiries, we certainly feel that we are going to be, probably not as good as this year because this year, we're showing 75% of completion and possibly trending a little bit higher towards the end of the year because we still are negotiating certain lease renewals. But -- so it should be -- I think it's going to end up between 75% and 80%, but certainly not above 80%. Next year, we know that there are certain tenants that are not renewing, either because they merged or actually going out of business and so on. But -- so I don't have clarity, but we have -- and we feel strongly that Q1 is going to be also in positive territory.

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Operator [10]

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(Operator Instructions) And next question will be from Yash Sankpal at Laurentian Bank.

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

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On your Montréal market, when I look at the occupancy trend, the south shore seems to be performing decently, but the north shore or the island, that region seems to be staying flat and it being the largest market. I was wondering, if you could provide some color and what you're seeing because the rest of, like other -- your peers are talking positively about the Montréal market. So if you could add some color there?

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

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There are 3 properties that are not performing well in the Montréal market. 1001 Sherbrooke, where we have leasing activity, but have not yet concluded the leasing -- the full leasing activity. And I remind you that we were at close to 25% in occupancy, and now we're showing an occupancy in that property of -- between 60% and 65%. So there's velocity there, but it's still dragging a little bit. Then there's a property in the Montreal Technoparc, where -- this is where the buyout from Shire occurred. So we bought out the lease from Shire for 30,000 square feet, and we re-leased roughly 1/3 of the space. So it's just a question of leasing velocity for that property, and we certainly think that this property is not problematic. Then there's a property in Henri-Bourassa where I've already said that it is a property, though it is for sale. We've received an offer to sell this property. However, we're debating whether we're going to counter given the level that it's at. But -- so this one has not been performing for us for the last 5, 6, 7, 8 years. So it's a difficult property.

So I would surmise that by June of next year, this property will not be part of our portfolio anymore. So it is very localized as far as the occupancy rate is concerned for the Montreal portfolio, and we are confident that it's going to pick up. Now there's another property that is not on the island of Montreal, but it's in Laval, where Laval is sort of showing good results. But it's a property that we purchased last year at the end of the year at 3131 Saint-Martin. And that property when we purchased it, we were at 75% occupancy. And right now, it's trending up as well. And we have an accepted -- a conditional accepted offer for the property that would take it to very close to 100% lease.

So when I said earlier that we do have activity, and we do feel that by year's end, we are going to be stable at our current occupancy rate or maybe a little bit better, but slightly, if it is better, not much, then I feel that -- Yash, we're always going to have properties that are not as good as others. So we concentrate and we get them leased, and then they're leased for 5, for 7, for 10 years. And then we turnaround, and then we have other tenants that are departing, and I guess, it's part of the day-to-day business. But all this to say is that we're very confident that our office sector is going to be performing at a better pace than we saw the performing -- the performance in the past quarters.

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

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Okay. And I just want to discuss your acquisition pipeline and your expectations for 2020?

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

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The acquisition pipeline is a difficult subject these days given that the market is in Montréal, in Québec city, and in Ottawa, given that it is -- these are 3 extremely strong markets, where we're seeing cap rates that are way below what BTB can afford. And given our steadfast concentration on concluding accretive acquisitions it is difficult to acquire and to acquire well. We've made numerous offers to acquire properties and most of the time, we're being beat by people that are definitely more aggressive. So we're looking forward for our cost of capital to go down so that we can compete again. We do have -- it's not all black clouds. We do have opportunities where we're under contract for an acquisition in Ottawa. We are looking at a larger acquisition in the Province of Québec. So all this to say is that we are on the lookout for acquisitions. It's difficult and whenever there's one that's concluded, I can tell you that everybody here is proud to have completed it as a result of the difficult markets that we're experiencing. So to give you a number because I think that it's a number that you're asking me, I certainly believe that we would be able in 2020 to acquire between $80 million to $100 million, and that would be a good target.

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Yashwant Sankpal, Laurentian Bank Securities, Inc., Research Division - Real Estate Investment Trust Analyst [15]

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Okay. And just on the industrial portfolio, you saw a jump in the occupancy rate, I assume that it includes committed leases. So maybe if you could add some more color?

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

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In the industrial property segment, I think that the jump was caused by the re-leasing of the property that is -- the tenant that is replacing Pharmetics and the leasing activity that we did conclude in Cornwall. So it's principally those 2 areas that have contributed to the increase in the industrial occupancy rate.

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Operator [17]

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And at this time, Mr. Léonard, we have no other questions. So I would like to turn the call back over to you.

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Michel Léonard, BTB Real Estate Investment Trust - President, CEO & Trustee [18]

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Thank you. Thank you very much for your participation this morning and also for your patience. We've been going through a big change at BTB in the sense that we recalibrated our portfolio. As we discussed during the last call, where I didn't expect to have such a high-impact on our AFFO and FFO, it did. Now we're seeing the light at the end of the tunnel, as Benoît mentioned, during our last call, and we're seeing our ratios coming down, which is fantastic. The resulting effect is that our portfolio contains high-quality properties, they are well-located in 3 markets for now, 3 important markets, which is Québec city, Montréal and Ottawa.

And as a result, I think that our numbers are definitely stronger. And the -- and when I say stronger, I'm not saying the stronger showing, I am saying that we can depend on our properties in order to bring the numbers to fruition in order for us to hit all the targets that we set for ourselves. So again, we've been patient. You've been patient, and we're very glad that everybody throughout this turnaround have had the patience for BTB. And again, the light is there, we see it at the end of the tunnel. So it's great for BTB, and we're on strong footings. So thank you very much, and we'll see you in the next quarter.

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Operator [19]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.