Pro Real Estate Investment Trust (PRVUN) Earnings Call Transcript

Good morning and welcome to PROREIT's Second Quarter Results Conference Call for Fiscal 2026. [Operator Instructions] For your convenience, the results release, along with the second quarter financial statements and management's discussion and analyses, are available at proreit.com in Investors section and on SEDAR+. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements and non-IFRS measures. PROREIT's remarks today contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements, or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or development to differ materially from those expressed or implied by the forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A, dated August 12, 2026, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as at August 12, 2026, and except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. The discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to, and not as a substitute for, or in isolation from the PROREIT's IFRS results. For description of these non-IFRS financial measures, please see the Second Quarter Earnings Release for Fiscal 2026 and Non-IFRS Measures section in the MD&A for the second quarter of Fiscal 2026 for additional information. I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT.

Thank you, Vanessa. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary. Also joining us for our Q&A session is Zachary Aaron, Vice President of Investments and Asset Management. We're pleased with our second quarter performance and the positive momentum across the business. Let me start with our investment activity. The second quarter was particularly active for PROREIT. In June, we completed the acquisition of 17 industrial properties in Quebec City and Winnipeg for a combined purchase price of $136.8 million. These acquisitions meaningfully expand our industrial platform in two markets with strong underlying fundamentals. In Quebec City, we established immediate scale of 13 industrial properties representing approximately 609,000 square feet of GLA, acquired for $112.8 million. In Winnipeg, we further strengthened our position in one of Canada's tightest industrial markets, where we are now the second largest industrial landlord. We added four properties representing approximately 159,000 square feet of GLA for $24 million. Together, the two portfolios were funded through a combination of proceeds from our recent equity financing, which I will discuss in a few minutes, and $89.4 million of new mortgage financing. During the quarter, we also completed the previously announced acquisition of a newly built, fully leased industrial property in Moncton, New Brunswick for $12.3 million. Built in 2024, the single-tenant property comprises approximately 60,000 square feet of GLA. Our investment activity continued following quarter end. We acquired four additional industrial properties in Winnipeg, totaling approximately 165,000 square feet of GLA for $21.7 million. At the same time, we continue to optimize the portfolio with the sale of a retail property in Bathurst, New Brunswick for gross proceeds of $1.4 million. Altogether year-to-date, we've acquired 22 high-quality industrial properties for $170.8 million, bringing our portfolio to 126 income-producing properties, representing approximately 7.4 million square feet of GLA. We also completed $107.3 million of equity financing during the quarter, including an $83.3 million bought deal offering and a $24 million private placement. The private placement included participation from our strategic partners, Collingwood Investments and Parkit Enterprise. Financing strengthened our liquidity and financial flexibility and supported the execution of our growth plan. Let me now turn to our operating performance in the second quarter. Revenue, NOI, and FFO all increased year-over-year, while same property NOI continued to grow despite the impact of two previously disclosed vacancies. These results reflect the contractual rent growth, strong renewal activity, and the continued mark-to-market opportunity embedded in our portfolio. Our core geographic markets continue to present strong fundamentals. Nova Scotia, one of our key markets, is well positioned to benefit from the anticipated boom of federal defense spending investment over the coming years. In Halifax, Amazon's recently announced operation hub is under construction in our Burnside Industrial Park, where we are one of the largest landlords. Together with increased defense and infrastructure investment, we believe these developments provide additional long-term demand drivers for this key industrial market. Turning to leasing activity, momentum remained strong during the quarter. As of today, we have renewed approximately 83% of our 2026 lease maturities at positive average spreads of 36.8%. Within our industrial portfolio, 80.4% of the 2026 maturities have been renewed at an average positive spread of 40.6%. Our completed lease renewals will begin contributing incremental cash flow during the second half of the year. More than 400,000 square feet will begin generating higher rental rates in September, with the full quarter impact reflected in Q4. Notably, five lease renewals commencing in '26 included rental increases ranging from approximately 40% to 45%. Overall portfolio occupancy was 95% at quarter end compared to 97.8% a year earlier. As noted on previous calls, the change is primarily driven by the impact of two vacancies. The first one is our 176,000 square foot industrial property in Saint-Hyacinthe, Quebec, which became vacant in 2025. As previously announced, we signed a 15-year lease for approximately 74,000 square feet, representing 42% of the property that will be cash flowing July 1, 2026. The new base rent of that space represents an increase of more than 122% compared to the previous tenant's rent for the same GLA. With rent commencement on July 1, the new lease will contribute an incremental cash flow beginning in the third quarter. The second vacancy relates to approximately 81,000 square feet in Woodstock, Ontario, which became vacant April of this year. These are high-quality properties and we continue to actively market the available space. Excluding these two property vacancies, portfolio occupancy would have been approximately 97.4% at quarter end. Alison, over to you.

Thank you, Gordy, and good morning, everyone. We are pleased with our second quarter performance. Property revenue totaled $27 million, up 7.7% year-over-year. The increase was mainly driven by contractual increases in rent and higher rental rates on lease renewals and new leases, and contributions from four additional properties compared to the prior year. NOI was $16.5 million, an increase of 6.5% year-over-year, driven largely by these same factors. Same property NOI representing 97 of our 122 properties at June 30 was $14.3 million, up 3.3% year-over-year. Industrial same property NOI increased 2.9%. The increase reflects contractual rent escalations, stronger renewal rates, and higher rents on new leases. This was achieved despite a decline in overall average occupancy related to the two vacancies Gordy mentioned earlier. FFO totaled $8.5 million for the quarter, an increase of 6.1% year-over-year, primarily reflecting higher contractual rents and stronger renewal and new lease rates, partially offset by increased interest and financing costs. On a per unit basis, basic FFO was approximately $0.12 compared with $0.13 a year ago, reflecting the higher weighted average unit count following the equity financing and the timing of capital deployment. The basic AFFO payout ratio was 98.9% in Q2 compared with 89.8% in the same quarter last year. The increase primarily reflects the timing differences between the June equity financing and the deployment of those proceeds into acquisitions, as well as higher interest and financing costs. As we deploy the proceeds from the equity financing and benefit from the contribution of our recent acquisitions and completed lease renewals, we expect these factors to support our financial performance going forward. Net cash flows provided from operating activities were $10.6 million in the quarter, up 54.3%, mainly impacted by the timing of cash receipts and the settlement of payables. The weighted average capitalization rate for our portfolio remains stable year-over-year at approximately 6.7% at June 30, 2026. Turning to the balance sheet, we remain focused on maintaining financial flexibility while reducing leverage over time. Total debt to total assets was 47.4% at June 30, down from 50.6% a year earlier. Adjusted debt to gross book value was also 47.4% compared with 50.7% a year earlier. Adjusted debt to annualized adjusted EBITDA was 10.0x at June 30 compared with 9.8x a year earlier, reflecting the timing of the deployment of proceeds from the equity financing. We remain focused on maintaining financial flexibility and reducing leverage over time. At quarter end, our total debt, including current and non-current portions, totaled $609.2 million compared to $562.4 million at the same date last year. At June 30, we had $71.7 million of remaining mortgage maturities in 2026. As of today, all of those maturities have either been refinanced or are subject to renewal commitments. Subsequent to quarter end, approximately $32.9 million of maturing debt was refinanced with $40.4 million of new mortgages, while approximately $38.8 million was committed for a one-year renewal. Looking beyond 2026, we have $55 million of mortgage maturities in 2027 and $66.8 million in 2028. The weighted average interest rate on those maturities are 4.8% and 3.5% respectively. Finally, our distribution of $0.0375 per unit was maintained for the second quarter of 2026. That wraps up our financial review. Gordy, back to you for closing remarks.

Thank you, Alison. We're pleased with the progress we made during the quarter and enter the second half of 2026 with a larger industrial portfolio, meaningful leasing momentum, and increased financial flexibility. Our recent acquisitions have strengthened our presence in key Canadian markets, where our leasing results continue to demonstrate the embedded growth within our existing portfolio. Looking ahead, our priorities remain clear. Driving growth, integrating our leasing and acquisitions, maintaining a disciplined approach to capital allocation, and continuing to strengthen our balance sheet. We believe we are well positioned to build on this momentum and continue to create long-term value for our unitholders. Thank you for joining us today. Vanessa, we're now ready to take questions.

Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] We have our first question from Sam Damiani with TD Cowen.

First question for me, the headlines on the sort of defense spending has seem to continue building in recent months. I'm just wondering if there's anything you're seeing in any of your leasing markets that materialize as a result of that government spending?

Yes, I'll let Zach jump in on that. He's on daily calls in Halifax and whatnot, so he probably can describe that to you a bit better.

Yes, sure. Zach here. Hi, Sam. Yes, there is definitely a lot of buzz related to the defense spending and what that might mean, especially for a market like Halifax and Atlantic Canada in general. In our portfolio specifically, we haven't seen anything just exactly direct yet on that front, but we are starting to see some rumble about that, and I think just in the last, you know, quarter or two, between some of the leasing in Bayers Lake and some other chunkier spaces in and around Halifax and Burnside, that we believe some of that has been tied to defense spending and, you know, related contracts to those kind of projects. So we are starting to see that heat up here significantly. I think you're seeing it in the office side as well. I know Lockheed had a recent kind of larger announcement with more jobs to come here in Halifax. So it's definitely real and palpable here. And I think we'll start to see more effects of that as, you know, some of these contracts get awarded out and more progress is made on that front.

Thanks, Zach. That's interesting and helpful. I guess over to the acquisitions, which just recently closed. Anything surprising that you've seen since closing?

It's Gordy. So, no, I mean, as expected, to date, the Winnipeg 8 assets, former Artis assets that were very close to our portfolio. No major leasing to be done in the next couple of years there. I picked up the keys in a day and it's just part of the portfolio, so nothing there. Quebec City, no negative surprises. At this point in time, we're setting up our process of setting up our property management office in Quebec City. Zach’s heavily involved with the leasing there and the rent roll that we assumed in those transactions. Zach can jump in because he's talked to the leasing there specifically, but I think there's a little bit of a buzz in Quebec City as well, just compared to even six months ago. So maybe Zach can highlight it better.

Yes, not too much to add. I mean, Winnipeg, I would say status quo to what we expected and what we kind of already know about Winnipeg. Quebec City, obviously a bit more of a learning experience there. We're working closely with the CBRE team locally in Quebec City who knows that market super well. And I mean, just already, just little tidbits of just in terms of working with some tenants on renewals already, this year and for next year, some activity on some vacancy and things like that. It seems to be performing the way we kind of underwrote and are expecting. So I think Quebec City will be kind of a great complement to our existing platform. And I think we'll do well there.

Okay, great. Thank you. And last one for me, just you've got the two sort of chunkier vacant spaces in the portfolio. Do you see any other known or expected move outs in the near term of any consequence in terms of size as well?

It's Gordy. So nothing in 2026. We haven't told you about anything material for 2026. I mean, we're starting to knock on the doors in 2027. Nothing formal there yet for positives or negatives, really. So just rolling through the business.

We have our next question from Brad Sturges with Raymond James.

Just following on Sam's last question there, just on looking ahead to next year in terms of the '27 lease expiries, what do you have a sense or have a rough estimate what the potential mark-to-market could be on rollover for next year?

Zach, I'll turn it over to you. You just spent some significant time on a five-year model re-forecast, so I'm sure you can enlighten you a bit on that one.

Yes, hi there. Yes, I think we're in line to see more of the same. I think we're still kind of achieving 35% spreads and up on a weighted average basis. I think we'll probably be just realistically, maybe closer to kind of 25%, 30%, but still overall very healthy spreads as we still see a lot of rents coming out of Winnipeg, Ottawa and Burnside that are still quite significantly below market. So still a healthy amount of runway looking into 2027.