Post by
hawk35 on Aug 09, 2023 1:01pm
RBC Comments Today
August 8, 2023
BTB Real Estate Investment Trust
Strong quarter, leasing traction helping drive results
Our view: BTB REIT delivered a strong set of Q2 results that were punctuated by solid organic growth and increasing occupancy. Thematically, progress on the leasing front appears poised to continue— particularly within the retail segment where the REIT flagged increasing interest from national tenants. Looking ahead, we also suspect capital recycling initiatives could surface in 2H/23 as BTB continues to work toward its increasing industrial footprint—ultimately targeted to reach 60% of the portfolio by 2026. Maintaining Sector Perform rating.
Key points:
Strong Q2 print. BTB reported headline Q2/23 FFOPU of $0.118, which was above RBC/Street at $0.116E/$0.114E, and +3% YoY.
Fundamentals advance; retail segment shines. SP NOI was +1.7% YoY (+0.9% YTD), driven by retail at +15.9%, while committed occupancy of 94.1% was up 90 bps QoQ, and 30 bps YoY (retail +240 bps QoQ, +210 bps YoY). Renewal leasing spreads of +4.9% in Q2/23 were driven by office segment spreads of +5.1% across 174,200 sf.
Minor industrial acquisition in Q2; 2H/23 could see capital recycling. As previously announced, BTB acquired a fully leased 83,300 sf industrial property in Edmonton, Alberta in May for $7.4 million ($88/sf), with funding provided by the issuance of Class B LP units to the vendor, and the REIT’s credit facility. Looking ahead, BTB is marketing select non-core properties (primarily office) for disposition over the remainder of 2023. Proceeds, potentially in the range of $30-$60 million (gross), could be redirected into further industrial opportunities. Liquidity stood at $27.4 million as of June 30.
Outlook intact. Our 2023-24 FFOPU estimates are broadly unchanged at $0.45 (unchanged), and $0.46 (unchanged), with a corresponding 2022A-24E CAGR of +2% that stands above our diversified peer group average (-2%). We have introduced 2025E at $0.47 (+1% growth). Our NAVPU of $4.25 is -$0.25 amid a higher cap rate of 7.20% (+25 bps), with our forward NAVPU implying growth of 6%.
Maintaining Sector Perform rating, target price -$0.25 to $3.75 on the back of a reduced NAV. Our price target is predicated upon an unchanged 15% discount to forward NAVPU. BTB is trading at a 23% discount to our NAVPU (9x 2023E AFFO/7.8% implied cap rate), above our diversified peer group average discount of 32%. We believe the Trust should trade at a premium to our diversified peer group given an above average 2022A-24E FFOPU CAGR, portfolio makeup, and internalized structure.
RBC Estimates
FY Dec 2022A 2023E 2024E 2025E
FFO/Unit 0.44 0.45 0.46 0.47
P/FFO 7.5x 7.2x 7.1x 7.0x
AFFO/Unit 0.36 0.38 0.39 0.39
Payout Ratio 83% 79% 78% 77%
Q2 results strong
BTB REIT’s reported Q2/23 FFOPU of $0.118 was ahead of Street consensus at $0.114E, and RBC at $0.116E; vs. $0.114 last year (+3% YoY). Thematically, occupancy advanced, while SP NOI growth was driven by strong performance within the retail segment. Variance wise, differences to our outlook were minor with slightly higher NOI & lower G&A, offset by slightly higher interest costs.
Organic growth led by retail; IFRS BVPU ticks up QoQ
SP NOI growth was +1.7% YoY (+0.9% YTD) as strength in retail (+15.9%), was offset by lower industrial (-3.9%) and office (-1.8%) prints. BTB noted that the negative growth in the industrial segment was due to the timing of a known tenant departure that was replaced by the end of the quarter (see below), at a much higher rate.
In Q2/23, BTB’s IFRS BVPU of $5.48 was up 1% sequentially (+1% YoY), in the context of an IFRS cap rate of 6.50% (+1 bps QoQ, +26 bps YoY), below our 7.20% NAV cap rate (+25 bps) and current 7.8% implied cap.
Occupancy improved QoQ, led by strong gains in the retail segment
Committed occupancy stood at 94.1% (+90 bps QoQ, +30 bps YoY) as of Q2/23. This included retail at 98.3% (+240 bps QoQ, +210 bps YoY), office at 87.4% (-10 bps QoQ, -190 bps YoY), and the industrial segment at 99.7% (-30 QoQ, -30 bps YoY). In-place occupancy sits at 93.1% (+50 bps from Q1/23).
Leasing wise, while renewal spreads moderated to 4.9% in Q2/23 (from +13.9% in Q1/23), retention rates rebounded to 70% across 233,800 sf of expiries. Office spreads led at 5.1%, with retail spreads at 4.0%. Of the 69,600 sf not renewed at expiry this quarter, BTB subsequently leased 55,800 sf of this space to a new industrial tenant (Tire Craft) in Edmonton at a rental rate 36.6% above the previous tenant.
BTB continued to flag strong activity and interest within the retail segment, particularly from national tenants. At their Walmart-anchored shopping center in Lvis, Quebec, the REIT recently entered into leases with Bath & Body Works and Sephora, and cited interest and LOI’s from other national retailers for another 12,000 sf of new leasing and 43,000 sf of new density.
Minor industrial acquisition in Q2; potential capital recycling on the docket
In May 2023, BTB acquired 8810 48 Avenue NW, an industrial property located in the McIntyre industrial park in Edmonton, AB for $7.4 million ($88/sf). The 83,000 sf property was built in 1978 and consists of a Class A manufacturing facility with an office build out. It is currently leased to four tenants. Funding was provided in part via the issuance of 550,000 Class B LP units to the vendor, with the balance via the REIT’s credit facility.
Looking ahead, BTB noted that it continues to market select properties (primarily office) for disposition, and has thus far received good interest from potential buyers. All said, the REIT is confident it can achieve IFRS values on sales, and ultimately could realize proceeds in the range of $30-$60 million. Timing wise, management noted these would likely occur into Q4/23.
Leverage wise, BTB’s D/GBV of 58.8% was -20 bps QoQ (+20 bps YoY). The REIT had $3.7 million of cash and $23.7 million available on its credit lines as of June 30, amounting to liquidity of $27.4 million (or $37.4 million including an additional $10 million available through an accordion option).
Valuation
Our $3.75 price target is derived by applying a 15% discount to our one-year forward NAVPU estimate, which implies a target multiple of 10x to our 2023 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 $4.75 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 $2.50 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.