BTB Real Estate Investment Trust (BTBUN) Earnings Call Transcript

[Operator Instructions] Should you wish to follow the presentation in greater detail, management has made a presentation available on BTB's website at www.btbreit.com/investors/presentations/quarterly-meeting-presentation. [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 numerous factors and assumptions and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections, and other forward-looking statements will not be achieved. Several important factors could cause BTB Real Estate Investment Trust's actual results to differ materially from the expectations expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors that could influence actual results are described in BTB Real Estate Investment Trust's management's discussion and analysis and in its annual information form, which were filed on SEDAR+ and on BTB's website at www.btbreit.com/investors/reports. I would like to remind everyone that this conference call is being recorded. Thank you. We will now turn the conference over to Michel Leonard, President and Chief Executive Officer, accompanied today by Mr. Marc-André Lefebvre, Executive Vice President, Chief Financial Officer, and Chief Operating Officer, and Mr. Charles Doré-Bédard, Vice President of Finance. Mr. Leonard, you may begin.

Thank you very much, Sylvie, and good morning, everybody. We are going to, as Sylvie mentioned, talk about the quarterly review for Q3 2026. We stand at the end of the quarter at 5.9 million square feet with 72 properties and a total asset value of $1.3 billion. Before the end of the quarter, we closed on the disposition of an office property located in Trois-Rivières for $20 million. And after the end of the quarter, we disposed of an office property located on the south shore of Montreal on Taschereau Boulevard for $8 million. Those two dispositions obviously allow us to redeploy the proceeds into our investment activity by purchasing industrial assets with strong fundamentals and a good pipeline of value creation opportunities that we do have at our disposal right now. We do have other dispositions on the go, totaling roughly $87 million of office and retail dispositions where we have agreements and not conditional agreements in place. Obviously, the proceeds from these dispositions are going to be redeployed in industrial acquisitions, where we are under negotiations right now, with the objective of closing these transactions during Q1 2027. We are also involved in changing the zoning of the same retail property that we own on the island of Montreal. And it's looking more and more favorable as time goes on. The city allows us to do so, and we think that during 2027 we will have a good conclusion of all our efforts. The acquisition that we recently concluded on October 14th is basically the acquisition of a property in Alberta for a purchase price of $18,750,000. And the occupant of the property is Imperial Oil. The acquisition is expected to contribute $1.2 million in annualized net operating income for BTB. And as I mentioned, the disposition for an $8 million office property located on Taschereau Boulevard in Longueuil. So, so far this year, 2026, we concluded three acquisitions, including the acquisition after the end of the quarter, which represent a total of roughly $58 million, and the total NOI that is expected to be gleaned from these acquisitions is $4.2 million. If you're following me on the presentation, I'm at page 5. An interesting thing to note on page 5 is the fact that although we've been saying since 2018 that we're repositioning the portfolio into the industrial segment, we are now at the crossroads where the portfolio of office is just slightly above, on a percentage basis, the industrial portfolio. So since obviously 2018, but the numbers that we report on from 2021 where we were 20% industrial, right now we're at 38% industrial and 39% office, so we're seeing a reduction from the suburban office segment from 54% to 39%, and as we're continuing our dispositions and increasing the portfolio in industrial, the two lines are going to cross and we're going to see that the industrial portfolio is going to be of a heavier weight within the portfolio very soon. So if we look at the key metrics turning to page 6, as far as the fair value of our investment property, Marc-André is going to basically talk about the fact that we did receive external appraisals from outside appraisers for our portfolio, and we did adjust the fair value of our office properties and also the fair value of our retail properties. Regarding our leasing activities, we stand with an occupancy rate of 90.7%, slightly below Q3 2025, and we're definitely trying to catch up in order to finish the year on a positive note. A total area of 188,000 square feet was renewed during the quarter, or leased to new tenants, for a total activity of 772,000 square feet for the year to date, which is a good number. We concluded new leases specifically with GMAC Oilfield Services in Edmonton, and that's for a full building of 24,000 square feet that was obviously vacant and had been vacant for a good nine months. And we did lease an office space with Cohere in Ottawa in our property located in the Glebe district representing 10,000 square feet, which is a good sign for this building and the activity in Ottawa. As we discussed the last time, our lease renewal rate has been affected by the fact that the government has left our 100,000-square-foot building in Ottawa located on Walkley Road, and as such we put the property back on the market and we do have interested parties for this property. However, we have nothing concrete to report so far. The early lease renewals totaled 45,000 square feet for the quarter. And as I mentioned, our occupancy slightly decreased, but we achieved an average increase in lease renewal rates for the quarter of 6.6%, and that represents 5.7% in the industrial segment, suburban office at 11%, and necessity-based retail at 5%. So what's important, I'm turning to page 9. So basically as far as the increase in lease renewal rates, we're slightly trending at 5.6% for the year so far. With this, I'm turning the mic over to Marc-André in order to take you through the financial highlights of the quarter and the year to date.

Thank you, Michel, and good morning, everyone. For the quarter, rental revenues stood at $31.5 million, a decrease of 4.2% compared to the same quarter last year. Excluding the lease cancellation penalty payment that BTB received, the amount of $1.1 million in the third quarter of 2025, the decrease would have been $0.3 million or 0.9%. NOI and cash NOI both decreased by 10.1% and 6.3% respectively compared to the same quarter last year. Again, excluding the lease cancellation penalty of $1.1 million received in Q3 2025, the decreases would have been 4.8% and 0.9% respectively. Cash same-property NOI decreased by 7% for the quarter compared to the same period last year. For the nine-month period, cash same-property NOI decreased by 5.9%. The year-to-date decrease was mainly driven by both the industrial and office segments. The industrial segment was impacted by: first, a $1.1 million lease cancellation penalty that I just spoke about, and that was received in Q3 2025; and second, planned tenant departures in 2025, one of which occupied the 24,000-square-foot industrial property in Edmonton. Note that this property was re-leased during the current quarter and it is expected to have a positive contribution of $0.6 million on an annualized basis. The office segment was negatively impacted by: first, a partial lease cancellation payment of $1 million received in the first quarter of 2025; and second, the known departure of a suburban office tenant occupying over 100,000 square feet in Ottawa, which Michel just spoke about, and other planned tenant departures in Ottawa not yet fully replaced. That's a negative impact of $1.8 million. These decreases were partially offset by new leases concluded in Quebec City, representing a positive contribution of $0.4 million. Finally, the necessity-based retail segment contributed positively to cash same-property NOI by $0.8 million, driven by leasing activities and the addition of a new tenant at our Saint-Bruno property. Again, same exercise excluding the two previously outlined lease cancellation penalties totaling $2.1 million, amounts that were received in 2025, the cash same-property NOI decreases would have been 1.3% for the quarter and 2.3% for the nine-month period respectively. For the quarter, FFO adjusted per unit was 9.3 cents and AFFO adjusted per unit was 8.8 cents, representing a decrease of 2.2 cents and 1.3 cents respectively compared to the same quarter last year. The decreases were mainly driven by the previously explained decreases in NOI and cash NOI. Excluding the impact of the $1.1 million lease cancellation penalty received in Q3 2025, FFO adjusted per unit and AFFO adjusted per unit would have decreased by 0.1 cents and 0.9 cents respectively. We maintain our distribution to unitholders at 7.5 cents per unit for the quarter, which represents an annualized distribution of 30 cents per unit. The value of our investment property portfolio remains stable at $1.2 billion at the end of Q3. Michel spoke about this quarter; we externally appraised 32% of the properties based on fair market value and internally appraised 64% of the portfolio for a total of 96%. The balance of the portfolio will be evaluated according to Q4 2026. The exercise resulted in a gain of $3 million and the weighted average cap rate for the entire portfolio was stable at 6.7%. As Michel previously mentioned on the acquisition and disposition front, for the first nine months acquisitions contributed $1.3 million to NOI, and it was partially offset by an estimated $0.5 million impact from dispositions, resulting in a net positive contribution of approximately $0.8 million. On an annualized basis, we completed four acquisitions so far in 2026, and the positive contribution from these acquisitions is $4.2 million as Michel previously stated, and on the disposition front, we completed the disposition of four office properties. The NOI loss from these dispositions is $3.6 million, for a net positive contribution of $0.6 million. We concluded the quarter with a total debt ratio of 57.4% and a mortgage debt ratio of 50.9%, down by 40 basis points since year-end. The weighted average interest rate on our mortgage portfolio was 4.47%, a slight increase of 8 basis points compared to the same period last year, primarily reflecting the refinancing of certain fixed-rate mortgages at slightly higher rates. Finally, at the end of the quarter, we have $1.4 million in cash and $15.1 million was available under our credit facilities, for total available liquidity of $16.5 million. So this completes our presentation. We will now open the call to questions. So operator, can we please have the first question on the line?

[Operator Instructions] First question will be from Matt Kornack at National Bank Financial. Please go ahead.

Good morning, guys. Just want to quickly touch on Ottawa and what you're seeing there. Obviously, in terms of prospects for backfilling some of the vacant space, but also any anticipation you may have within the suburban office portfolio there and in Montreal in terms of leasing in 2026 and 2027?

Well, Ottawa, over the last three years, Ottawa suffered from the fact that the federal government started to not renew its leases as a result of work from home or working outside of the office. And so it created some kind of uncertainty in the market. And now with the new government in place, there's a return to work and as a result, there is a rising demand for office space in the Ottawa landscape. And so the tenant that left us—and the address of the property is 2204 Walkley Road—was a federal government entity. And now we're getting traction from other federal government entities that are looking at our building. As far as our confidence level is concerned, we think that we're going to get traction and be successful. But with anything with the government, I think it moves slower than other entities. As a result, I can't give you any kind of judgment as far as whether it's going to lease in January or in June of next year. I would anticipate by June of next year it should be under contract. And I don't know if it's going to be occupied, but I would surmise that if all goes well, this property should be leased, at least on paper, by June of next year. We have another property in Ottawa on Aberdeen Street that suffered the departure of a tenant that was linked to government operations. They basically manage leases for the government. And as the government reduced its leasing footprint, all of a sudden they were out of work, and so they did not renew their lease. And we do have traction again on this property. And these are really the two properties where we're having a higher vacancy rate. If we look at the property that we own in the Glebe district, where in Q3 and Q4 last year we had a vacancy as a result of a tenant that had sublet its space and basically did not renew the lease because the space was under sublet, we were able to conclude a lease for a smaller area with the subtenant. So now we have a direct tenant instead of having a sub-landlord or subtenant. And as I reported, we did a lease with Cohere. And one of our main tenants—if you look at the picture of the building on our website, you'll see the name of the main tenant of the property—we're negotiating an expansion, and we think that this expansion of this main tenant would be closed within 30 days. And also one of the tenants that we just leased space to needs to expand. So I surmise that this property is going to be 100% leased within the next three months. So really, the focus on leasing in Ottawa is on Walkley Road and Aberdeen Street. Brewer Hunt is full, so our main target is to ensure that these two properties are going to be leased, and it is an exercise that we're doing seriously. We've always looked at leasing on a serious basis, but we're all hands on deck on this one.

That's great. Appreciate it. Maybe if we could expand the discussion to the industrial portfolio and also on retail, and then maybe just a clarification. I think there was some mention of existing free rent periods. If you could give us a sense as to when those burn off and how that would impact same-property NOI growth as well, that'd be helpful.

I will leave that portion to Marc-André. As far as the industrial side is concerned, it's going well. There's only one property where we're not getting the traction that we want: it's the industrial property in Laval, which is 132,000 square feet. We're getting interest from tenants that want part of the building, and the difficulty is not splitting the building because it is splittable, but what are we left with is the big question, in the sense that if we lease 60,000 square feet out of 132,000, is the 32,000 square feet that's going to be left leasable? So that in part creates a certain uncertainty, but this is something that we can solve given the velocity. But in essence, we've decided firmly that we were going to subdivide the property instead of having one tenant; we will have two or three tenants on this property. But we're hopeful that we'll be able to at least lease part of it by year's end—maybe 30%, something like that. But at least we'll start the velocity on that front. The rest of the properties: we've leased in Edmonton the 24,000-square-foot property that was left vacant as a result of a non-renewal because the building was too small for the occupier. So we were successful in finding a tenant for that space, so we were happy. As far as Edmonton and Saskatoon are concerned, we're pretty well leased. But the area of concern for us, or where we're spending a lot of time, energy, and effort, is basically the property located on Highway 15 in Laval, a suburb of Montreal.

Yes, and for the free rent question, we have around, I would say, $600k of free rent in the current quarter. I would say that half of that will be, if I could say, translated into actual rent in Q4. So maybe around $350k of positive revenue in Q4 that's stemming from free rent in the current quarter.

Okay, great. That's helpful. Last one for me on the acquisition and disposition activity. I missed it earlier. I know you had spoken to the NOI contribution, but could you give me the cap rates for the Trois-Rivières property—that's the one in Longueuil—and then also the acquisition in Alberta?

Yes, well, it's difficult to give you a cap rate for Trois-Rivières because it was 80% occupied. So if you calculate it on the basis of the NOI, the cap rate was like 5%; if you calculate it on the full building and so on, it was 8.5% or 8.6%, however you calculate it. And as far as the Taschereau property, it was 8%. The Taschereau property we paid, I think, way back in 2008 or 2007; we had purchased that property for $4 million and something. So it's not a bad deal. Okay, and then the acquisition cap rate for Alberta? For Alberta, the cap rate that we used for what's going to be called eventually the Imperial Oil Building was 6.4%.

And is that—it sounds like it's fully occupied—would we call those market rents at this point in terms of what they're going to pay?

Yes, yes, absolutely. Yes.

Okay, perfect. Thanks, guys.