Canadian Net Real Estate Investment Trust

Good morning. I would like to welcome everyone to Canadian Net REITS 2024 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session, and instructions will be provided at that time. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would like to advise everyone that this conference is being recorded. Before we start, I have been asked by CanadianNet to read the following message regarding forward-looking statements and non-IFRS measures. In talking about financial and operating performance, and in responding to questions today, management may make forward-looking statements. including statements concerning Canadian NET's objectives and strategies to achieve them, as well as statements with respect to plans, estimates, and intentions, or concerning anticipated future events, results, circumstances, or performance, which are not historical facts. These statements are based on current expectations and assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the risks that could impact actual results and the expectations and assumptions management applied in making these forward-looking statements can be found in Canadian NET's most recent Annual Information Form for the year ended December 31, 2023, and management's discussion and analysis for the period ended June 30, 2024, which are available on our website at www.cnetreit.com and on CDAR Plus and at www.cdarplus.com. Management will also refer to non-IFRS financial measures today, which are widely used in the Canadian real estate industry, including FFO, AFFO, and NOI. Management believes these financial measures provide useful information to both management and investors in measuring the financial performance and the financial condition of Canadian net. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similarly titled measures reported by other entities. For more information, please refer to the section Non-IFRS, financial measures of our MD&A for the period ended June 30th, 2024. I would now like to turn the conference over to Kevin Henley, Canadian Net REITs president and CEO. Please go ahead, Mr. Henley.

Thank you, operator, and good morning, everyone.

Our portfolio continued to perform very well during Q2. We maintained our 100% occupancy and 66% payout ratio. In addition, we are pleased to announce the sale of one gas station property during the quarter for approximately $1.8 million. We are also advancing well on our Betty & Co. development in Belleuil, Quebec, which will come online in the fall. This development will add approximately $68,000 of NOI on an annual basis to the REIT through its joint venture operations. The business continues to perform well. Our niche of necessity-based retailers remains robust, and we expect them to continue performing well in today's economic environment. While we are starting to hear about consumers cutting spending, we believe there is no better place to be right now than necessity-based retail. We reported a 4% decrease in FFO per unit from 16.1 cents to 15.4 cents. This was almost entirely due to higher interest expenses on our lines of credit and our 2023 mortgage renewals. Now halfway through 2024, we are already benefiting from decreasing rates on our lines of credit and mortgage renewals. Our debt ladder has minimal expiries in 2024 through 2026, hence the most significant impact of higher rates has been absorbed. We expect future mortgage renewals to have very minimal impact on CNET. As we resume our growth through acquisitions and with scheduled rent increases, we will more than offset future mortgage renewals. It is also important to mention that we repaid two convertible debentures over the last two years, including one in 2022-2024. We chose to do so through our lines of credit instead of renewing convertible debentures at much higher rates. While this created shortened pains, it was a very disciplined decision from which we are benefiting already. Again, we believe CNET's balance sheet and debt ladder are well positioned, having absorbed the impact of interest rate increases. Turning over to lease renewals, we renewed our last 2024 lease, representing approximately $60,000 in base rent. Looking at 2025, we have five leases coming up for renewal, representing approximately $2.35 million of NOI. Of those, two leases representing approximately $1.15 million, or 49% of expiring rent, have been renewed. The combined renewal spread is 2.6%. The man remains excessively strong in our asset class. The properties on which we have expiring leases hold strong positions in their markets, and rents are below markets. As we move into the year, more of the 2025 leases will be renewed. Our weighted average lease term remains at 6.5 years. As we look at this transaction market, the decrease in all-in mortgage rates will open doors for CNET. Finally, I would like to address probably the most important moves CNET did in 2024. Shortly after quarter-end, we disposed of an additional four gas station properties, bringing our total dispositions in 2024 to five non-core properties representing $12.8 million in gross proceeds and approximately 7.6 million in net proceeds. This works in our favor in three ways. First, we paid down our credit facilities. Second, we believe those transactions will high-grade the CNET portfolio. Finally, as the transaction market picks up, this unlocks liquidity, which Dorit will use to reinvest in accretive opportunities. We're very happy with the progress made in 2024 so far. With high rates behind us, liquidity in hand, and operating in an excessively strong asset class, CNET is in a great position to resume its growth. I will now turn the call over to Ben Gizis, Canadian Net Chief Financial Officer, for a more detailed review of our financial results. Thank you.

Thank you, Kevin. For the six-month period ended June 30th, 2024, we generated FFO per unit of 30.6 cents, down 4% compared to 31.8 cents for the same period in 2023. FFO for the period ended June 30th, 2024, decreased to $6.3 million compared to $6.5 million for the same six-month period last year. FFO was impacted by higher interest charges on mortgage renewals, variable rate mortgages, and credit facilities, partially offset by contractual rent step-ups. During the same period, property rental income was $13.1 million, an increase of 2% compared to $12.1 million for the same period last year. NOI was $9.6 million, down 1% from $9.7 million for the same period in 2023. Rental income and NOI were impacted by increases in base rents and recoverable additional rents of certain existing properties, partially offset by decreases in rental revenue for property disposition. The IFRS value of our adjusted investment properties, which is the total of our wholly owned investment properties and our proportionate share of the investment properties held in joint ventures, was $316 million as of June 30, 2024, compared to $332 million a year earlier. The decrease is primarily due to an increase in IFRS cap rates as well as property dispositions. We continue to maintain a prudent approach with respect to our leverage and our payout ratio, having a debt to gross assets ratio of approximately 58%, consistent with the debt to gross assets ratio at the same time last year. Excluding convertible debentures, debt to gross assets was 55% as at Q2 2024, compared to 54% as at Q2 2023. Our FFO payout ratio for the period ended June 30th, 2024 was 56%, a slight increase from 54% for the same time last year. Our properties are typically financed with fixed rate amortizing mortgages. As of June 30th, 2024, the REITs exposure to variable rate debt is composed of two variable rate mortgages and its credit facilities. And one of these variable rate mortgages is associated with a property that was sold subsequent to quarter end. We have $8 million of mortgages rolling over in 2024. These are excluding mortgages in our JVs, and the rest of our debt ladder remains well-structured, including in the mortgages rolling over our $3.7 million of mortgages associated with properties held for sale, all of which were sold subsequent to quarter end. Current average terms of maturity on our mortgages is 4.2 years. That summarizes our key results for the quarter. We will now open the lines for any questions. Operator?

Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. At this time, I'm showing no questions. I would now like to turn the conference back over to Kevin Henley for closing remarks.

Thank you, everyone, for joining the call.

To conclude, I would like to say that, as mentioned earlier, high rates have been absorbed by the REITs. We're in a great position. We did solid disposition moves this year. So thank you all for joining and keep following for more. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.