RBC Comments on Q4RBC analysis confirms this is a safe play to enjoy a generous 10% dividend. Payout ratio over the next two years is scheduled to fall even with higher interest rates. When Bank of Canada starts lowering rates, watch this stock start to climb higher. Here is the RBC report.
February 27, 2024
BTB Real Estate Investment Trust
A nice finish supported by strong leasing spreads
Our view: BTB REIT delivered a nice finish to the year with Q4 results that were generally in-line with our outlook and Street consensus, supported by another round of impressive renewal leasing spreads. Looking ahead, we expect the REIT will remain disciplined in the current environment, with a continued focus on lease-up of targeted vacancies within Qubec City top of mind. Not to be overlooked, selective densification development opportunities should also help drive value over the medium-term. We are maintaining our Sector Perform recommendation and $3.50 price target.
Key points:
Solid Q4; operating fundamentals robust. BTB reported headline Q4/23 FFOPU of $0.111, which was generally in-line with RBC/Street at $0.113E/ $0.113E. SP NOI was very strong at +6.5% YoY (+2.1% YTD), driven by retail at +10.5% and office +7.8%. Committed occupancy reached an all-time high of 94.2% and was up 50 bps QoQ, and +100 bps YoY. Once again, renewal leasing spreads were robust at +14.3% in Q4/23 (9.2% YTD), driven by retail, where renewal of a government tenant helped fuel a +43.3% spread.
2024 refinancings well underway. With $145 million of 2024 mortgage maturities, BTB has to date received commitment letters on the vast majority of mortgages due in 1H/24. Directionally, the REIT pointed toward interest rate impacts of circa +140 bps on these refinancings. A $24 million convertible debenture is also due Oct-24. With a D/GBV of 58.4%, liquidity stood at $23 million as of Q4/23.
Densification opportunities ongoing, non-core office dispositions could surface. In the context of the current environment, BTB is taking a cautious approach to capital deployment—a prudent choice in our view. Instead, the REIT continues to advance select densification opportunities. This includes the previously announced agreement with a developer to add a residential component to a retail site in Montral, where an update from the city on rezoning is expected mid-year (proceeds to BTB of $30 million related to air rights over the life of the project). Dispositions of non-core office properties also remain a possibility for 2024, but will ultimately be dependant upon surfacing appropriate valuations.
Outlook maintained. Our 2024E-25E FFOPU estimates of $0.45/$0.46, respectively, remain broadly unchanged and point towards a 2023A-25E CAGR of +3% that stands above our diversified peer group average (-2%). Our NAVPU of $3.75 is unchanged amid a cap rate of 7.55% (+5 bps).
Maintaining Sector Perform, target price $3.50 on the back of an unchanged 15% discount to forward NAVPU. BTB is trading at a 20% discount to our NAVPU (8x 2024E AFFO/8.1% implied cap rate), above our diversified peer group average discount of 38%. We believe the Trust should trade at a premium to our diversified peer group given an above average 2023A-25E FFOPU CAGR, portfolio makeup, and internalized structure.
Valuation
Our $3.50 price target is derived by applying a 15% discount to our one-year forward NAVPU estimate, which implies a target multiple of 9x to our 2024 AFFO per unit estimate. We believe our target multiple appropriately reflects the REIT’s diversified asset base, relatively smaller market cap, internalized management structure, and operating performance. The implied return to our price target supports our Sector Perform rating.
Upside scenario
Our $4.25 upside scenario assumes that NOI growth exceeds our base case forecast by 2% and that units trade at a ~5% discount to our NAV per unit one year hence. In this scenario, where the REIT is exceeding our forecast, we think a higher P/ NAV ratio would be justified.
Downside scenario
Our $2.25 downside scenario assumes that NOI growth falls short of our base case forecast by 4%, capitalization rates rise by ~25 bps, and the units trade at a 20% discount to our NAV per unit one year hence. In this scenario, where cap rates are expanding and the REIT is falling short of our forecast, we think a lower P/NAV would be justified.
Investment summary
Our Sector Perform rating is primarily a function of our total return expectations versus the broad REIT/REOC sector. Key features of the BTB REIT story include:
A Diversified Asset Base. BTB holds commercial property across the office, retail, and industrial asset classes, predominantly in Qubec (Montral & Qubec City) and Eastern Ontario (Ottawa). In late 2021, the REIT expanded its presence into Western Canada by purchasing ten properties (nine industrial, one office) in Edmonton and Saskatoon. Today, across a gross leasable area (GLA) of over 6 million sf, BTB is just under 45% weighted toward suburban office buildings and over 30% toward industrial, with the circa 25% balance held in retail assets.
Targeting an increased industrial exposure. Having surpassed $1.0 billion in total assets, BTB has framed a goal of reaching $2.0 billion in total assets by the end of 2026. In conjunction with the growth targets, BTB will look to increase its industrial exposure towards 60% of investment properties, with a decreasing emphasis on office and retail. Over the past number of years, we believe BTB has benefited from targeted portfolio high-grading, something we expect will continue.
Densification Opportunities at Select Retail Properties Could Unlock Value. BTB has identified about 6 of its retail properties that may be suitable for densification opportunities, which we find intriguing. On this front, the REIT has entered into a conditional agreement with a developer to add a residential component to one of its grocery-anchored retail sites in Montral. All said, this densification project has the potential to add about 900 residential units, with proceeds of $30 million to BTB (related to air rights) over the life of the project. This would equate to upside of circa $0.35 per unit.
Risks to rating and price target
On the upside, we would flag greater-than-expected leasing velocity or rental rates which, all else equal, should translate to higher SP NOI. In addition, we point out execution of densification opportunities, as another potential positive catalyst. In general, risks associated with the ownership of real estate property include general economic conditions, access to debt and equity capital, interest rates, local real estate markets, credit risk of tenants, supply and demand for leased premises, competition, potential regulatory changes, and the impacts stemming from the COVID-19 pandemic. Prolonged impacts related to interest rate increases as well as office market headwinds could weigh on financial performance and in turn, the sustainability of distributions.