Canadian Net Real Estate Investment Trust

Good morning. I'd like to welcome everyone to Canadian Net REIT's 2024 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question and answer session, and instructions will be provided at that time. I would like to advise everyone this conference is being recorded. Before we start, I've been asked by Canadian Net 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 objective and strategies to achieve them, as well as statements with respect to plans, estimates, intentions, and or concerning anticipated future events, results, circumstance, 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 conclusions in the forward-looking statements. Additional information on the risk that could impact actual results and the expectations and assumptions management's applied in making these forward-looking statements can be found in the Canadian NET's most recent annual information forum for the year ended December 31st, 2023, and many of this discussion and analysis for the period ended December 31st, 2024, which are available on our website at www.cnetreit.com and on CDARplus at www.cdarplus.com. Management will also refer to non-IFRS financial measures today which are widely used in Canadian real estate industry, including FFO, normalized FFO, AFFO, and NOL. 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 definition prescribed by IFRS and may not be comparable to similar title 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 December 31st, 2024. I would now like to turn the conference over to Kevin Henley, Canadian Net REIT President and CEO. Please go ahead, Mr. Henley.

Thank you, Operator, and good morning, everyone. Thank you for joining us today as we walk you through our fourth quarter and full year 2024 results. Reflecting on the past year, we are pleased with the strategic progress we've made particularly in executing key sales and acquisitions that enhance our portfolio. Over the year, we completed the sale of five gas station properties, generating gross proceeds of approximately $12.8 million. We swiftly redeployed these funds, acquiring a single-tenant Sobeys property in Truro, Nova Scotia, for $9 million in October. Following year-end, we further strengthened our portfolio with an additional $12 million investment in three single-tenant properties in Labrie, Quebec. These acquisitions were secured off-market at attractive capitalization rates of 7% and 8%, with mortgage rates of 4.5% and 4.8%, respectively. As a result, these transactions are highly accretive to our FFO per unit and aligned with our strategy of enhancing the quality of our portfolio. Importantly, they reinforce our commitment to increasing our exposure to necessity-based retail tenants, while demonstrating our ability to source high-quality opportunities within our niche. Given the timing of these acquisitions, one in October and the other in January 2025, their full impact will be realized in 2025. Our focus on necessity-based retail continues to pay off, and we anticipate even greater opportunities ahead. While macroeconomic uncertainty persists, leading to more cautious consumer spending and restrained business investment, our niche remains exceptionally resilient. Our tenants are performing well, and with interest rates beginning to decline, we find ourselves in a strong position. For the three-month period and the December 31, 2024, FFO declined from 3.33 million to 3.25 million, a decrease of just 2.5% compared to 2.8% for the 12-month period, demonstrating that CNET has successfully absorbed the majority of interest rate increases on mortgage renewals from 2023. We are also now benefiting from lower rates on our credit facilities as well as reduced interest expenses on our convertible debentures thanks to our ongoing repayment throughout 2023 and 2024. Furthermore, the recent acquisitions at the end of 2024 and beginning of 2025 will have further positive impact going forward. Ben will provide further details on the year-end results shortly. That said, Q4 was our strongest quarter of the year, underscoring the themes we've discussed over previous quarters, specifically The impact of mortgage renewals at the peak of 2023 is behind us, and with our recent acquisition, we shifted back into growth mode. Turning to lease renewals, we have six leases set to expire in 2025, representing approximately $2.42 million of NOI. Of these three leases, accounting for $1.83 million, or 76% of expiring rents, have already been successfully renewed at an average rental increase of 4%. The remaining three leases are expected to be renewed as we progress throughout the year. Looking ahead to 2026, we have 14 leases reaching maturity, representing approximately 3.47 million NOI. One of these leases has already been renewed, with rental adjustments to be finalized. We remain confident in our ability to retain tenants and will provide further updates on 2026 renewals as the year unfolds. Our portfolio remains well positioned with a weighted average lease term of six years and 100% occupancy. I'll now hand over the call to Ben Gaziz, CNET's CFO, for a detailed review of our financial results.

Thank you, Kevin. For the 12-month period ended December 31st, 2024, we generated normalized FFO per unit of 61.1 cents, down 3.8% compared to 63.5 cents for the same period in 2023. Normalized FFO for the period ended December 31st, 2024, decreased to $12.6 million compared to $13.1 million for the same 12-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 dispositions, partially offset by lower interest charges on credit facilities, convertible debentures, and mortgages associated with these property dispositions. It's worth noting that our Q4 acquisition helped mitigate the decline, though its full impact will be realized in 2025. During the same period, NOI was $18.9 million, down 3% from $19.4 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. The decrease was partially offset by increases in base rents of certain existing properties and a property acquisition in Q4. Property rental income was $26.1 million, a decrease of 2% compared to $26.5 million for 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 12-month period ended December 31st, 2024, the trust administrative expenses increased to $1.2 million compared to $1 million for the same period in 2023. This increase is largely due to a one-time sales tax expense of $117,000 relating to previously claimed input tax credits, as well as related interest and penalties, which are added back to normalized FSO. Admin expenses were also impacted by higher legal and professional fees. We expect the three-month Q4 2024 admin expense to be a good run rate for admin expenses for 2025. 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 $325 million as of December 31, 2024, compared to $331 million a year earlier. The decrease is primarily due to property dispositions during the year, offset by the acquisition of SoBiz and Truro in Q4 2024. We continue to maintain a prudent approach with respect to our leverage and payout ratio, having a debt-to-growth asset ratio of approximately 56% compared to 57% as at the same time last year. Excluding convertible ventures, debt-to-growth assets was 54% as at Q4 2024, compared to 53% as of Q4 2023. Our normalized FFO payout ratio for the periods ended December 31st, 2024 was 56%, a slight increase from 54% for the same period last year. Our properties are typically financed with fixed rate amortizing mortgages. As of December 31st, 2024, the REIT's exposure to variable rate debt is limited only to its credit facility. We have 11.6 million of mortgages rolling over in 2025, excluding mortgages in our JVs, and the rest of our debt ladder remains well-structured. Current average terms of maturity on our mortgages is 3.9 years. That summarizes our key results for the quarter. We will now open the line for any questions.

Operator? Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star 1-1 again. We will pause for a moment while we compile our Q&A roster. Our first question comes from Zach Wee-Wiseboard with Canada Cord. Your line is open.

Thanks. Good morning.

Good morning, Zach.

It's great to see the external growth resuming. With leverage in the high 50% range, how much capacity is there for additional acquisitions? And I realize the low payout ratio helps with retained cash flow.

So I would say in the first few months of the year, our focus in terms of acquisitions use of capital will be refinancing properties in order to repay the $6 million convertible to venture in November. When it comes to acquisitions externally, we always have early refinancing opportunities on certain of our properties. And so if we find interesting acquisitions, that's what we'll do.

Okay. And given where the payout ratio is today, do you believe that distribution increases are viable for 2025?

Historically, we do distribution increases as FFO per unit increases. And so as we evolve into 2025, that is something we could consider.

Okay, thanks. And last question for me. I noticed there was a maintenance capex charge of around $100,000 in the quarter. It was noted that it will generate additional income for the trust. Can you just give a bit more color on that?

Yeah, so actually the $100,000 that will generate extra income was completed, I believe, in Q2. The extra that we did in this quarter will not be generating extra income. It's just pure maintenance capex on the property.

Got it. Appreciate the color. Thanks.

One moment for our next question. Our next question comes from David Christall with Ventum. Your line is open.

Thanks.

Good morning, guys.

Good morning, David. Can you comment on the kind of transaction market, both for potential new acquisitions and also any potential dispositions and maybe cap rates and investment spreads on both sides of the equation?

Yeah, I would say on the disposition front, we did the bulk of the work last year. I would say this year we're more focused on capital recycling through refinancing and acquisitions. When it comes to acquisition, I think there's definitely greater interest in our asset class right now. I believe that necessity retail is now living its 2020 industrial moment, if you wish. However, our sourcing remains exceptional when we think of the network we've built over the years, the markets where we buy our assets, secondary, tertiary markets. And so for us, opportunities are still plenty. It always takes time to analyze them, but we're in a very good position.

Okay, and obviously your priority you mentioned is kind of up financing to repay the debentures. But how do you look at potentially using buybacks and allocating capital there?

Well, buybacks are not on the table for now. The reason I would say is, again, we still find great opportunities on the market. So step one is refinance and make sure that the capital is all lined up for the November, the venture. Step two, any excess capital will be deployed into acquisitions because the deals we find are still way more creative for the trust than unit buyback. And as a growing REIT with plenty of opportunities, the market remains extremely fragmented. And so our capital is best used growing through a property acquisition than unit buyback at the moment.

Okay, thanks. I'll turn it back.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. And I'm not showing any further questions at this time. This does conclude the conference call for today. You may all disconnect and have a wonderful day.