Canadian Net Real Estate Investment Trust

Good morning. I would like to welcome everyone to Canadian NetWeed's 2024 Third Quarter Earnings Conference Call. At this time, all participants are on 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 conference, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. I would like to advise everyone that this conference is being recorded. Before we start, I've 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 make forward-looking statements, including statements concerning CanadianNet 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 risk and uncertainties that could cause actual results to differ materially from the conclusion in these forward-looking statements. Additional information on the risks that could impact actual results and expectations and assumptions management applied in making these forward-looking statements can be found in Canadian NED's most recent annual information forum for the year ended December 31, 2023, and management discussion and analysis for the period ended September 30, 2024, which are available on our website at www.cnedread.com. and or Cedar Plus at www.cedarplus.com. Management will also refer to non-IFRS financial measures today, which are widely used in the Canadian bullshit industry, including FFO, normalized FFO, AFFO, and NOI. Management believes these financial measures provide useful information to both management and investment in measuring the financial performance and 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 ending September 30, 2024. I would now like to turn the conference over to Kevin Henley, Canadian NetSuite's President and CEO. Please go ahead, Mr. Henley.

Thank you, operator, and good morning, everyone. Our portfolio continued to perform very well during Q3. We maintained 100% occupancy and completed our 2024 capital recycling program, disposing of four additional properties in Q3 for a grand total this year of approximately $12.8 million. These properties, all service stations operated by independent operators, created new opportunities for the REIT. We promptly redeployed part of that capital into a $9 million grocery store acquisition in Nova Scotia shortly after quarter end. This property is immediately accretive to the trust, acquired at a 7% capitalization rate. As we highlighted in previous quarter, the return of healthy spreads between capitalization rates and interest rates remains evident. For this transaction, we secured financing at approximately 4.5%, making the deal highly accretive despite spreads being slightly lower than historical norms. We will further benefit as rates continue to decline. On the development front, our Bennion co-location in Belleuil opened on October 1st, right after the quarter end. This addition will contribute approximately $68,000 in annual NOI to the REIT. Our niche in necessity-based retail continues to thrive, and we foresee increasing opportunities. Grocers and quick service restaurants are executing ambitious growth plans and CNET has strategically positioned itself to capitalize on this momentum. We reported a 4% decline in normalized FFO per unit, which Ben will detail shortly. This decline aligns with prior quarters and is primarily driven by higher interest expenses from mortgages renewed in 2023, and for Q3 especially, higher straight line rent impact due to property sales. While we are currently absorbing this impact, CNET is positioned to resume growth in 2025. Turning to lease renewals, as of the last quarter, all 2024 leases have been renewed. For 2025, we have five leases expiring, representing approximately 2.35 million of NOI. Of these, three leases, accounting for 1.83 million, or 78% of expiring rents, have been renewed. We expect a roughly 5% increase in expiring rents, as one of the leases remains under negotiation. The MNNR asset class remains robust, and the properties with expiring leases hold strong market position with rents currently below market rates. As the year progresses, we anticipate renewing more of the 2025 leases. Our weighted average lease term remains steady at 6.2 years. As this is our final earnings call for 2024, I'd like to take a moment to reflect on the progress we've made this year. We began 2024 knowing it would be impacted by the many mortgages renewed in 2023 during peak interest rates. Despite this, We successfully managed the impact, resulting in a 4% decline in normalized FFO year-to-date. As rates continue to decrease, refinancing will not have a material impact on the trust, while acquisitions are becoming more and more attractive. Beyond rates, we executed several strategic moves, including the well-timed sale of five non-core properties just as the market opened. This enabled us to acquire high-quality, nationally tenanted assets and maintain sufficient liquidity to fund additional accretive projects. In summary, we navigated higher rates, realized value from existing properties, redeployed capital for 2025 growth, and furthered and enhanced the portfolio. Looking ahead, we're excited about what's to come in 2025 and beyond. I'll now hand the call over to Ben Gezis, CNET's CFO, for a detailed review of our financial results. Ben?

Thank you, Kevin. For the nine-month period ended September 30th, 2024, we generated normalized FFO per unit 45.3 cents, down 4% compared to 47.3 cents for the same period in 2023. Normalized FFO for the same period ended September 30th, 2024, decreased to 9.3 million compared to 9.7 million for the same nine month period last year. Normalized FFO was impacted by higher interest charges on mortgage renewals, decreases in rental income due to property dispositions and straight line rent adjustments associated with the property disposition. partially offset by lower interest charges on credit facilities and mortgages associated with these property dispositions. During the same period, NOI was $14.2 million, down 3% from $14.5 million for the same period in 2023. NOI was impacted by decreases in rental revenue from property dispositions and straight-line rent adjustments associated with the property disposition, partially offset by increases in base rents of certain existing properties. Property rental income was $19.3 million, consistent with the same period last year, and was impacted largely by the same elements as NOI, but was also impacted by increases in recoverable additional rents. For the nine-month period ended September 30th, 2024, the trust administrative expenses increased to $960,487 compared to $761,767 for the same period in 2023. This increase is largely due to a one-time sales tax expense of $117,187 relating to previously claimed input tax credits, as well as related interest and penalties, which were added back to FFO. Administrative expenses were also impacted by higher legal and professional fees. We expect Q3 2024 to be a good run rate for admin expenses for the remainder of the year and for 2025 after adjusting for this one-time sales tax expense and about $35,000 of professional fees recorded during the quarter relating to this sales tax work. The IFRS value of our adjusted investment properties, which is the total of our wholly owned investment properties and our proportionate share of investment properties held in joint ventures was 317 million as of September 30th, 2024, compared to 331 million a year. 54% compared to 57%. So just to back up, 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 54% compared to 57% as at the same time last year. Excluding convertible debentures, debt to gross assets was 53% as at Q3 2024 compared to 54% as at Q3 2023. Our normalized FFO payout ratio for the period ended September 30th, 2024 was 57%, a slight increase from 55% for the same period last year. Our properties are typically financed with fixed-rate amortizing mortgages. As of September 30, 2024, the REIT's exposure to variable-rate debt is limited only to its credit facility. We have $4 million in mortgages rolling over in 2024, including mortgages in our JVs, which was renewed shortly after quarter-end, and the rest of our debt ladder remains well-structured. The current average term to maturity on our mortgages is 4.1 years. That summarizes our key results for the quarter. We will now open the line for any questions. Operator?

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question, coming from the line of Zachary Wiesbrock with Canaccord, your line is now open.

Hi, good morning.

Morning, Zach.

The IFRS capitalization rate dropped considerably during the quarter. Is that a reflection of the recent transaction activity in the market? I also know there was some higher yielding assets that were sold during the quarter.

Yeah, so on the first point regarding IFRS, yes, this is due to more transactions. We did last quarter during Q2 received a significant increase across the board based on very limited data out there. the data was updated to reflect more transactions this quarter. As for your second question, if you could please repeat, I just want to make sure I answer it correctly.

Yeah, I just wanted to know if it was a function of the transaction activity that you're seeing in the market today. And I also know that there were some higher yielding assets that were sold in the quarter.

Yeah. So for the higher yielding assets that we sold, so this was really a strategic move. We could do those transactions Off-market, one seller, as mentioned oftentimes before, we have a very solid pipeline with the ability to redeploy the capital. So we did those deals. Also, they align with our vision to reduce exposure to independently operated gas stations. Some of them had variable rents. So that's really a strategic move on our side. As for what we see on the market, I would say there is tremendous demand right now for retail assets. Retail, especially necessity based retail, it's having a moment right now. I think people realize the state of the economy, the strength of those tenants and the quality of the leases. And so we are seeing still in this market QSRs selling the five caps we are seeing, especially for the smaller asset. For the larger assets, we still see a lot more volume than we've seen in 2023, for example.

Okay. It's good to see the transaction activity picking up. And with more stability in the cap rates now, is there greater visibility on the volume of acquisitions you're going to be targeting over the next year or so?

Listen, deals are always hard to – we cannot state an amount and then go and just buy it, right? We need to make sure every deal makes sense for the REIT on an FFO per unit basis. That being said, we do see more and more opportunities. Historically, our pipeline has been off market. It still is today. Those transactions are hard to time because obviously we maintain relationships with those sellers. We do the deals when possible. So I wouldn't speculate on an amount of acquisitions. All I can say is we do have a solid pipeline at the moment.

Okay, thanks, Kevin. And Ben, just to clarify for the G&A expenses in the quarter, what portion of that would be recurring going forward?

So I think the SG&A for Q3 2024 represents a good run rate going forward if you remove that one-time $117,000 adjustment and also about $30,000 of professional fees going forward.

Okay, thanks a lot. I'll turn it back.

Thank you. And our next question coming from the line of David Crystal with Financial Yellen is now open. Thanks.

Good morning, guys. Maybe just another quick one, Ben, on the modeling side. Some of the commentary suggested there was some changes in the straight line rent, obviously the aggregate number change, but is Q3 24 a good number from both an IFRS NOI perspective and then an AFFO straight line rent adjustment perspective?

Yeah, so I think rental income for Q3 is a good run rate. You just need to adjust for specifically the straight line rent impact associated with the disposition was about $50,000. So if you add that back and then adjust for some of the acquisitions announced after the quarter, and also one of the GVs that Kevin mentioned that went online after the quarter, that should be a good run rate.

Okay, great. And then, Kevin, on the kind of capital recycling side, you spoke to the acquisition environment, but do you have any more dispositions in the hopper, or does it kind of need a use of proceeds to match up to the acquisition side?

I would say we did the recycling we wanted to do in 2024. We'll always remain opportunistic when it comes to recycling. At the moment for 2024, it's done. We're really more focused on redeploying the capital that – that we generated from those deals. As we enter 2025, it is a possibility that we will continue the capital recycling program, but it's really a property by property specific program. We're not doing this as a full portfolio exercise. So if there's good opportunities, we'll do it. And yes, to your question, obviously we won't start selling properties if there's no pipeline to deploy, but the pipeline is healthy.

okay and uh and when you look at your kind of priorities in terms of deploying your next dollar or capital how would you rank buybacks acquisitions or is there any kind of high value capex within the portfolio that you get a good return on uh i would say the priority is really to grow the REIT right we're all we've always been uh a growth REIT uh we're still tiny in a market that's highly fragmented our niche is super strong it's

it's getting easier and easier to get financing. So the best use of capital for us is to buy properties in our niche. In terms of CapEx, obviously we do it when required, but the best use of capital remains to buy properties. On units buyback, again, nothing beats buying an accretive deal. So at this moment, it's really use of capital is to buy deals.

Okay, great. Thanks, guys. I'll turn it back.

Thank you. And as a reminder, to ask a question, please press star 11 on your touch-tone phone. We'll give it a moment.

And again, to ask a question, please press star 11.

And our next question, coming from Delaina, Alexander Leon with the Jordan Capital Markets. Your line is now open.

Hey, good morning, guys. Good morning, Alex. My first question is on some of the lease renewals. The 2024 lease renewals that have already been done, I'm just curious if there's any of those that are actually going to be taking effect in the fourth quarter.

Only one, but it's not material.

Okay, got it. And looking for maybe 2026, I'm just curious if there's any renewals that are known to have any fixed step options or if those are going to be mostly renewed at market?

I would say that the bulk of it has preset options to it. So to answer your question, we had one at market which we renewed in the previous quarters, but the other ones have fixed options.

Okay. You mentioned four and a half percent financing rate on the Nova Scotia acquisition. I'm just curious, was that assuming the existing mortgage?

Nope. That was a brand new mortgage.

Brand new. Okay. Interesting. So is that safe to say the remaining 2024 mortgage maturities that you mentioned that got refinanced post-quarter, would that be kind of similar to that four and a half percent?

Yep. I would say it's really dependent on the asset and the lender, but I would say between 4.5 and 4.75 is where we see rates right now.

Okay, awesome. That's it for me. Thanks a lot.

Thank you. Thank you.

And again, if you'd like to ask a question, please press star 1-1. And at this time, I am showing no further questions. That does conclude our conference for today. We thank you for your participation and you may now disconnect.