Canadian Net Real Estate Investment Trust

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 5 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 3 single-tenant properties in La Baie, 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 align 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 3-month period ended 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 '25 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 6 leases set to expire in 2025, representing approximately $2.42 million of NOI.

Of these 3 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 3 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 in NOI. One of these leases has already been renewed with rental adjustment to be finalized.

We remain confident in our ability to retain tenants and we'll provide further updates on 2026 renewals as the year unfolds. Our portfolio remains well positioned with a weighted average lease term of 6 years and 100% occupancy.

I'll now hand over the call to Ben Gazith, CNET's CFO, for a detailed review of our financial results.

Thank you, Kevin. For the 12-month period ended December 31, 2024, we generated normalized FFO per unit of $0.611, down 3.8% compared to $0.635 for the same period in 2023.

Normalized FFO for the period ended December 31, 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 dispositions. The decrease was partially offset by increases in base rents of certain existing properties and the 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 element as NOI, but was also impacted by increases in recoverable additional rents. For the 12-month period ended December 31, 2024, The Trust's administrative expenses increased to $1.2 million compared to $1 million for the same period in 2023.

This increase is largely due to a onetime 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 FFO. Admin expenses were also impacted by higher legal and professional fees.

We expect the 3-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 at 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 Sobeys in Truro in Q4 2024. We continue to maintain a prudent approach with respect to our leverage and payout ratio, having a debt to gross asset ratio of approximately 56% compared to 57% as at the same time last year.

Excluding convertible debentures, debt-to-gross assets was 54% as at Q4 2024 compared to 53% as at Q4 2023. Our normalized FFO payout ratio for the period ended December 31, 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 31, 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 and our JVs, and the rest of our debt ladder remains well structured. The current average term to 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?

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 use of capital will be refinancing properties in order to repay the $6 million convertible debenture 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. 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 little bit more color on that?

Yes. 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.

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?

Yes. 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 leaving 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 1 is refinance and make sure that the capital is all lined up for the November debenture. Step 2, any excess capital will be deployed into acquisitions because the deals we find are still way more accretive 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.