Canadian Net Real Estate Investment Trust reported year-over-year gains in funds from operations (FFO), FFO per unit and net operating income (NOI) in its second quarter ended June 30.
Quarterly FFO jumped 27 per cent to $3.29 million from a year earlier, while FFO per unit rose by seven per cent to 16 cents per unit. The FFO increase was primarily due to the impact of newly acquired properties, which was partially offset by interest on mortgages associated with those properties.
NOI was 32 per cent higher, at $4.51 million, than during the same quarter a year earlier. The NOI increase was also attributable to the impact of newly acquired properties.
Canadian Net REIT (NET-UN-X) is an open-ended trust that acquires and owns triple-net and management-free commercial real estate properties. It owned 99 properties in Eastern Canada valued at $285 million at the end of the second quarter.
Insiders own 14 per cent of the units of the Montreal-headquartered REIT.
99 per cent occupancy rate
Much of the portfolio is leased to retailers, national service station and convenience store chains, and quick-service restaurants. It had a 99 per cent occupancy rate at the end of Q2.
“Our business, which is focused on owning and acquiring properties on a triple-net-lease basis, allows us to be somewhat immune to inflation, as higher operating costs are borne by our tenants,” president and chief executive officer Jason Parravano said during the REIT’s Aug. 25 second-quarter results conference call.
“The REIT’s operating costs for our properties are almost exclusively charged back to our tenants under the structure of our leases, with a few exceptions.
“With respect to interest rates, we have been able to take advantage of mortgage assumptions at pre-heightened levels, which has allowed us to take advantage of meaningful spreads between interest rates and going-in cap rates on newly acquired acquisitions.”
Acquisitions and developments
Canadian Net REIT made four property acquisitions during the second quarter:
• a 30,500-square-foot Giant Tiger store in Truro, N.S.;
• a 35,991-square-foot Metro grocery store-anchored retail strip in St-André-Avellin, Que.;
• a 29,698-square-foot Metro store in Chénéville, Que.;
• and a 3,500-square-foot Couche-Tard service station and convenience store in St-Jérôme, Que.
“We continue to add properties to the portfolio that diversify our tenant mix as well as the geographies we are exposed to,” Parravano said.
Subsequent to the quarter, Canadian Net REIT purchased its first New Brunswick property: a 4,400-square-foot Midas auto service centre in Fredericton acquired for $975,000. It also bought a 53,151-square-foot RONA hardware store in Chateauguay, Que. for $8.3 million.
“These properties are positioned in irreplaceable locations in high-traffic retail nodes and leased to strong covenant retailers, similar to the composition of the existing portfolio,” said Parravano.
Parravano said pricing seems similar to that seen before the recent interest-rate hikes, but not a lot of product has come to the market. Interest-rate volatility may be scaring off some private investors and reducing competition for some assets, he added.
“We’re looking at a lot of deals that are being presented to us,” Parravano said.
Canadian Net REIT will complete the development of a quick-service restaurant in Terrebonne, Que. in the coming weeks and recently began the redevelopment of a Burger King location in Jonquiere, Que.
Canadian Net REIT leasing
Canadian Net REIT has completed all 2022 leasing renewals, with no tenant turnover, at rent hikes ranging from five to 25 per cent.
The REIT has 10 leases expiring in 2023, representing approximately $800,000 in NOI, of which half have already been renewed.
Rent bumps have ranged from 2.5 to six per cent, while some leases include consumer price index-based increases. The remainder of the 2023 renewals should be completed by the end of this year.
The weighted average lease term for the portfolio is 7.2 years.
Debt and mortgages
“We continue to maintain a conservative approach with respect to our leverage and our payout ratio,” chief financial officer Ben Gazith said during the call.
Canadian Net REIT reduced its debt-to-asset ratio to 56 per cent from 57 per cent for the same period a year earlier, while the FFO payout ratio increased to 55 per cent from 52 per cent during the same time frame.
Parravano said he would be willing to go up to a 60 per cent debt-to-asset ratio if the right acquisition opportunities present themselves.
Canadian Net REIT’s preference over the years has been to take the longest available term for mortgages in order to mitigate rate reset risk. It has three mortgage renewals remaining in 2022, with a maturity value of less than $4 million.
The trust has $10 million in mortgages rolling over in 2023, including in joint ventures, but the bulk of its renewals won’t occur before 2027. The current average term to mortgage renewal is 5.5 years.