BTB Real Estate Investment Trust (OTC:BTBIF) Q1 2019 Results Earnings Conference Call May 15, 2019 10:00 AM ET
Benoît Cyr - VP and CFO
Michel Léonard - President and CEO
Conference Call Participants
Yashwant Sankpal - Laurentian Bank
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 2019 First Quarter Ended March 31, 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 and described in BTB Real Estate Investment Trust management discussion and analysis of financial results, and 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.
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 the conference.
Thank you very much.
In the first quarter of 2019 we saw our occupancy rate increase from 89.3% to 91.7% and as a result of more than 200,000 square feet of leases that were committed for future occupancy. As of the third quarter of 2019, we anticipate to generate an additional income of $525,000 or $0.01 per unit specifically related to the conclusion of a lease with a new tenant to replace the bankrupt Pharmetics. We're carrying the Pharmetics bankruptcy bill for the first and second quarter of 2019.
Nuera which is our new tenant for 130,000 square feet has already begun the process of installing itself in the facility. And we anticipate that as of July 1, Nuera will begin paying rent an additional rent. The bankruptcy also contributed to the revenue shortfall and additional expenses for the REIT of $375,000 or [$0.047] for the first quarter as a result of the bankruptcy where now we have to support real estate taxes and operating expenses for the property.
As far as our prospects for certain properties that were purchased in 2018, the Sainte-Catherine and Crescent property when we purchased this property we had an occupancy rate of 20%, now we stand at 57%. We have good traction for the remainder of the ground floor space and the ground floor is in the state that is going to bring the most NOI for this property.
We acquired on December 28 the Saint-Laurent property. When we purchased we had a 15% vacancy in total for both properties. And we are negotiating presently with tenants and we surmise that we will bring our occupancy rate close to 95% this year.
In Complexe Lebourgneuf Phase I, we anticipate that the next quarter as of June 30 we will show a 92% occupancy rate which is going to be a record occupancy rate for this property since we purchased this property. The other dragging property was Complexe de Lery in Trois-Rivieres. We concluded a small transaction and there seems to be interest for this property within the market a level of interest that we are yet to see.
We significantly increased in the average net rental rate for lease renewals and we saw that percentage go up by 5.6% and this will improve our income for the same property portfolio in the coming quarters. The same property NOI was negative as a result again of Pharmetics situation and the buy of the lease of Shire during 2018. So an increase in rental income by 1% and that’s despite the reduction of our total leasable area caused by a disposition of properties in the portfolio.
Also a significant decrease in our total debt ratio from 64% to 61% and our mortgage debt ratio from 56% to 54% and this decrease obviously affect the results as we have not redeployed capital as a result of the decrease in our debt ratio, but we anticipate that this will free up several million dollars in the leverage for future acquisition of accretive properties. We saw this year decline in certain key performance indicators and Benoît will discuss fully those decreases.
We have currently a very active pipeline for acquisitions given the amount of money that we could redeploy and I’d like to discuss the recent acquisition of the industrial property located in Pitfield Boulevard. First thing is that this property was purchased at $11.85 million. The NOI in place is $870,000 and that represents a cap rate of 7.25. The property is leased to a company called SC360. They are the certified installer for Vidéotron everything Vidéotron as far as TV and network and so on and it also work as installers for Bell and the like.
Our lease is for a guarantee cash flow for eight years, for a term of eight years. When we purchased this property it was appraised by [Altas] at $13.6 million. On those worthy factor regarding this acquisition is concurrently or almost concurrently with this acquisition with dispose of the Antonio Barbeau property. The Antonio Barbeau property was generating an NOI of $500,000, yearly $500,000. The reason that we sold this property that we anticipated that the property would suffer some vacancies in the next coming years, and as a result we found the purchaser for proceeds of disposition of $7.1 million.
And that is we have equity of $3,900,000 in the property. So if we compare this to the NOI that is going to be generated from our purchase of the SC360 property, so as I mentioned the NOI is $870,000 a year and that the equity that we put in this property was $4 million. It is a good investment for BTB as I mentioned earlier 7.25 as cap rate.
So if we turn to balance the equity that we had in Antonio Barbeau at $3.9 million and the equity that we put in the Pitfield property at $4 million, the ratio was roughly 97%. However, with a ratio of 97% we are creating value on the NOI of roughly $357,000 on a yearly basis. And we created value by purchasing the property at $11.8 million compared to the disposition of $7.1 million.
So we created value with this purchase as compared to the disposition both on the NOI and on the actual property valuation. So as I mentioned we did dispose - no, I didn’t mentioned this. So that we did during the quarter disposed a property located in Delson.
That property was anchored by a prodigal or a Loblaws and Loblaws has given us notice that they would go far and we were able to find the buyer of the property for $22.5 million, we had paid $21.5 million and in like of the going part of Loblaws that solved a big problem, although we were able to profit from the sale.
We in the course of negotiation, we negotiated a balance of sale with $600 million and the terms and conditions of the balance of sale will be presented to you by Benoît. On March, we disposed of a retail condominium that was located adjacent to the Delson property, so we have chosen not to remain a smaller owner in light of what was going on with the center of Delson and the proceeds were $1.9 million and so we generated call it a profit, the reflect profit of $100,000.
We did dispose as I mentioned at Antonio-Barbeau, we acquired the SC360 property and in summary, we are now at 65 properties representing5.3 million square feet.
And with this I would like to ask Benoît to walk us into the detail of our - of this morning's presentation.
Thank you. Good morning, everyone.
I have mentioned during this quarter we will dispose two different properties both on Georges-Gagné, Boulevard and Delson Québec, total selling price around $24.5 million. We’ve agreed for a balance of sale with the purchaser of $6 million at 7% interest rate and for a maximum of five years. Our current base of these two disposition around $24 million.
At the end of the March, our portfolio consisted of 65 properties representing close to 5.3 million square feet of leasable area and are reading a market value of approximately $818 million. As mentioned to post quarter event, the sale of the Antonio-Barbeau property for $7.1 million for a net proceeds of $4 million at the reimbursement of the mortgage loan and the acquisition of 65,000 square feet industrial building on Pitfield Boulevard in Montreal.
We replace a $7 million property producing at $1million of NOI by $12 property, $870,000 of NOI by using the same equity. Before discussing our financial results in detail, I would like to throw some events and factors that secured recently and has affected the first quarter earnings.
First, bankruptcy of Pharmaprix, this was discussed earlier by Michel Léonard. Now this property is fully leased but the shortfall of revenues and additional operating costs during this quarter total amount of $375,000 or $0.07 per unit.
Second, in 2018 we received the cancellation penalty of 75% of the residual amount payable by the Shire under its lease on the Saint-Martin property Montréal. The lease by generated a non-recurring income in 2018 will affect the results of this first quarter by approximately $225,000 or almost $0.04 per unit. We are experiencing strong activities in the recon space and we expect to resolve the situation over next quarters.
Third, I’d mentioned, we had acquired the Sainte-Catherine building with an occupancy rate of less than 20%. In October 2018 we moved our Head Office into this property and proceeded to lease spaces to third parties. At the end of the March, the place of lease rate is close to 60% and the vacancy causes a shortfall in revenues of approximately $225,000 or $0.06 per unit.
Finally we did a straight line rent receivable write-off of $319,000 following the ramification of the new place - write-off assets our earning and some of our indicators by $0.06 per unit. These four factors creates a shortfall of $1,250,000 in the quarter or $0.022 per unit.
We would also note that as previously mentioned that we lease more than 200,000 square feet for seats scheduled for later this year, we anticipate those leases will generate additional income of $525,000 for the third quarter and $635,000 for the fourth quarter.
Revenues generation from these leases will improve the current situation by more than $0.01 per unit for the third quarter and $0.011 per unit for the fourth quarter. Also we see a significant decrease as mentioned in our debt ratio and therefore a financial leverage of several million dollars is available to redeploy capital. This capital maybe used to purchase separated property and bring additional contribution to improve performance indicators.
Finally, we have not set clearly deploy the capital from sale of properties close during the last few quarters. We still have $4 million in cash and $4 million available on our acquisition facility. And $8 million available to invest in acquiring acquitted properties without having to resume additional equity.
So for the first quarter, renewals were up 1% or $200,000 compared to the same in 2018. We recorded an increase in our operating expenses of 6% or $1.6 million between the first quarter 2018 and the first quarter of 2019.
Our NOI is down 3.5% for the quarter compared to the same in 2018 and is at 51.1% at percentage of revenues. Acquisition completed during the last four quarters contributed to an increase of our NOI by $1.5 million, while the shortfall from disposal contributed during the same quarter is noted at $1.0 million.
Increases in operating expenses of the same property portfolio explained the decrease of our NOI. Financial expenses are up from $4.9 million to $7.8million. We’ve accounted a fair value adjustments of a total of $1.9 million of ours - on our swap and on the plant PLT unit at the end of March.
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 LT units. This non-cash item explained most part of the financial expense increase.
Our average weighted contractual rate of interest on mortgage loan is now at 3.97%, 17 basis points higher as of the end of Q1 2018. The weighted average term of our mortgage loans portfolio is five years and two months. Our total administrative expenses are $1.1 million, approximately the same as in Q1 2018. We’ve also accounted $215,000 for our unit-based compensation plant.
To appraise our portfolio, at the end of each quarter, we use cap rate provided by external evaluators. We have estimated that the value of the real estate portfolio recorded in the balance sheet at the end of March adequately represented its fair market value and that no material adjustment was we bought.
The weighted average cap rate of entire five year portfolio is 6.6% at the end of March 2019 compared to 7.1% a year ago. We present a net income of $1.4 million for the quarter, $2.5 cents per unit compared to $6.6 million in Q1 2018 or $13.5 cents per unit.
The same property portfolio for the quarter shows a small decrease of 0.7% in its revenue and a decrease of 4.3% in its NOI. The bankruptcy of Pharmetics with [indiscernible] since been fully released as of next July and the buyback of Shire lease into Technoparc are the two most important factors explaining and income for shortfall of approximately $415,000 for this quarter and the decrease in the same property portfolio indicators.
If not for these two factors the same property portfolio would have posted a 1.6% increase in its rental income and the NOI would have been stable. Our distribution increased from $5.1 million in Q1 2018 to $5.9 million in Q1 2019 including 11.6% of our distributions in unit under our business. Our distribution long-term for the quarter amounted $5.3 million or 9.4 cents per unit compared to 5.7 million and 11.7 cents per unit in Q1 2018. Our distribution payout ratio for the quarter stood at 111.6% from 89.7% in 2018.
Our recurring FFO reached approximately $4.7 million for the quarter compared to 5.7 a year ago, 8.4 cents per unit this year and 11.8 cents last year. Finally our recurring AFFO amounted $4.6 million, 8.3 cents per unit for this quarter compared to $5.2 million and 10.8 cents last year.
Our balance sheet presents investment properties at fair market value, amounting $818 million compared to $839 million last December, and $745 million in March 2018. We had $4.8 million in cash a balance of sales receivable of $6 million at an interest rate of 7% and other assets amounted $13.4 million. We spent during the quarter approximately $318,000 in recoverable and non-recoverable CapEx and we spent about $618,000 in TIs to meet the specific needs of our clients, as well as commissions to brokers.
Mortgage loans payable amounted $453 million at the end of March and were at $471 million since December and $425 million a year ago. Our mortgage loan to value ratio is now at 54.3% compared to 55.8% in last December and 66.1% in last March. We have two series of debentures outstanding for a capital value of $49.7 million. The Series E is redeemable at their principal amount. They mature only in March 2020 and for now it's not our intention to redeem them before their maturity.
At the end of March, we were using 15 million on our acquisition line of credit and our operation line was unused. We had $55 million of mortgage coming to maturity in the rest of 2019 as of to-date $26 million have already been renewed and [indiscernible] rate and a $3 million loan has been reinforced.
That's all from my section I would like to take your attention and I now turn back the conference to the facilitator for questions from analysts.
[Operator Instructions] And your first question will be from Yashwant Sankpal of Laurentian Bank. Please go ahead.
I just want to focus on the straight line write-off, which lease was it and what caused the drop?
It was in [indiscernible] building where a new tenant take the phase in place of the past one and it was - react to and they renegotiated the lease and place and we have to write-off the straight-line assets that we have in our balance sheet.
So was it a new lease or like I am just trying to understand or was it existing lease that was adjusted down?
The tenants that we had for this property was called Group SM, the SM Group and SM Group was sold to a company called [FINX] and this company - does not assume the lease we had to put on new lease in place with this group. So the new lease was under the same terms and conditions. However, we had to do this $319 write-off as a result of being a new lease.
So it’s not - so the building is fully occupied, it’s the same people that are in the property but the sale of the business was not concluded on the basis of sale of shares and was basis as a sale of assets. And hence we had to conclude a new lease with the purchasing entity.
Would there be a NOI impact because of this?
This is just it’s a one-time impact.
No, no your real rent that you’ll be getting from the tenant won’t be changed right?
It’s the same net rent. It's just that - we had accumulated this depreciation and because of the fact we have a new lease we had to write-off whatever company in the past.
Got it, okay.
So it's just a - it’s a non event in the sense that not really money out…
It’s a non-cash situation.
Right, got it, okay.
Just IFRS principles.
And this 375,000 of shortfall due to the Pharmetics lease, I'm trying to understand why the shortfall is impacting now at this point because the lease was - the bankruptcy was announced last year?
Yes because we don’t have to think any more and we're only going to generate income as of the 1st of July though the lease is in place with the new tenant but the new tenant only pays as of the 1st of July. So we have to assume all operating expenses for the property for instance snow clearing during the winter, electricity and real estate taxes. So we’re assuming for the month of January to June and we have obviously a shortfall on revenues because we're not generating that rent for the property until the 1st of July.
So is it the same case for the Crescent property?
The Crescent property is different because when we purchased the property we knew we had a vacancy and we knew that in order for the transaction to be accretive, we had to lease the space rapidly, the empty space rapidly. So we moved into the property in October of 2018. We already leased a part of the ground floor to a company called [indiscernible], its 1500 square feet. They are paying $75 net square foot for stock that is right next to the main entrance of the office building.
And we have a tenant in occupancy which is ECCO shoes they were there when we purchased and we have the remainder of the ground floor which is a state of roughly 2500 square feet. Right now we’re negotiating with two tenants and the negotiations with the two tenants are for the first I’ll talk about the offers not where we think we’re going to end up but the offers are $150 a square foot net to a $175 square foot net. So one is from premier tenant, the other one let’s call it lessor tenant than the premier tenant.
So we’re just - we’re waiting on this fact and we’re very confident that the whole ground floor is going to be before I’d say September 30. So it’s a great turnaround and it is a property that we thought that we are able to - we’d be able to turn it around rapidly. So it will take us less than a year.
The other aspect also is that when we moved in there was only one occupant on our fifth floor. Now the whole fifth floor is almost full. And there’s a space on the fourth floor, right next to our space that remains vacant and that’s we may lease it or eventually keep it for our own expansion as BTB grows.
So as far as the office space is concern in this property, there’s only the second floor that has remained vacant and we purposely kept it vacant because a lot of the retailers on same capital sheet are operating stores on two floors. So given that the rental - the net rental rates for the ground floor is very expensive for same capital sheet.
A lot of retailers are averaging down their cost of rent by taking some spaces on second floors. So we kept our second floor vacant purposely but we think that the tenant customers seeking to don’t leave the second floor so we’re going to turn it back to the market and lease it as an office store.
Thanks for that color. But my question was you talk about that the property had a shortfall, so if you bought the property without any material occupancy why is it causing you a shortfall when it is half leased, is it because of taxes or can like what is it?
It’s because the NOI that is generated by the property is covering a shortfall versus the anticipated NOI that the property would be generated - that we’ll generate. So that’s - its just - its non-cash in the sense that...
Okay. Got it. Okay.
It’s just an expression of - to show that when we lease that space or the vacant spaces that we believe that is going to be an additional amount of NOI that is obviously going to be generated from these leases.
I thought it was actual cash shortfall?
No, not at all.
And just lastly about this when to take back, is that take back before the actual sale proceeds or after the proceeds sold? I am trying to understand if you received actual cash?
So I don’t have the exact, maybe Benoît has the exact numbers. We sold the property for $22.5 million. So $22.5 million minus $6 million is $16.5 million. We have a mortgage of roughly $12 million on the property. So those quote me on the amount of the mortgage but roughly $12 million. So the net amount that came to the bank account was roughly $4 million from that sale and the balance of sale as Benoît mentioned is for five years. First three years 7%, fourth year is at 7.5% and the last year is at 8% the interest rate.
[Operator Instructions] And currently, gentlemen we have no other questions registered. So I would like to turn the call back over to you.
All right. Well, thank you very much for participating in our conference call at this morning. As we mentioned, believe me I am talking about Pharmaprix and talking about Shire but we are very confident that after the second quarter of this year these events are going to be faster and we’ll be back and Benoît told that is definitely going to be under 100%.
So that’s our goal. We are slightly working hard in order to attain our goal and that’s our only focus. So again, thank you very much for participating in the call this morning and we’ll see you at the next conference call.
Thank you. This does conclude today’s conference. You may now disconnect your lines.