BTB REIT: A Well-Covered 8% Yield, But Balance Sheet Concerns Are Real

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BTB REIT (TSX:BTB.UN:CA) (OTC:BTBIF) is simply a Canadian REIT focusing connected managing industrial, agency and necessity-based unit assets successful definite Canadian provinces. Headquartered successful Montréal, it's not a astonishment to spot astir 75% of nan leasable area is located successful nan state of Québec, pinch Ontario coming successful arsenic distant 2nd pinch conscionable complete 18% of nan leasable area (as of nan extremity of 2021). As of nan extremity of nan 3rd 4th of 2022, conscionable complete 20% of nan leasable area was classified arsenic necessity-based unit while off-downtown halfway agency buildings represented almost half of nan leasable are.

Asset Breakdown

BTB Investor Relations

BTB has its superior listing successful Canada, and arsenic that intelligibly is nan astir liquid listing and arsenic BTB reports its financial results successful Canadian Dollar, I will mention to that listing successful this article. Unfortunately, arsenic of nan clip of penning this article, nan 'English' fastener connected nan BTB website does not activity and each archiving is successful French. Readers tin find each relevant accusation successful English connected nan SEDAR website.

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While nan FFO and AFFO stay strong, nan equilibrium expanse will request immoderate attention

BTB isn't a large REIT. The full magnitude of assets connected nan equilibrium expanse are conscionable complete C$1.2B while nan REIT generates astir C$30M per 4th successful rental revenue.

Looking astatine nan REIT's Q3 results, we spot nan full nett income came successful astatine C$11.7M but this consequence was fueled by a affirmative effect of nan adjacent worth accommodation of derivatives to nan tune of almost C$4M. That is evidently not an constituent that should beryllium taken into information successful a FFO calculation, and that publication was removed from nan equation. The full FFO consequence during nan 3rd 4th came successful astatine C$9.7M while nan recurring FFO was C$9.8M aliases C$0.115 per share.

FFO Calculation

BTB Investor Relations

That was a bully result, but arsenic BTB REIT has rather a fewer agency buildings successful its portfolio, I deliberation nan AFFO consequence is simply a amended metric.

As you tin spot below, nan starting constituent is nan FFO consequence and nan full magnitude of adjustments is conscionable C$1.1M. I americium pleasantly amazed nan capex is beautiful debased astatine conscionable C$0.6M and this helped to study an AFFO of C$8.6M and conscionable nether C$8.7M connected a recurring basis.

AFFO Calculation

BTB Investor Relations

The recurring AFFO was astir C$0.102 per share, and nan recurring AFFO successful nan first 9 months of 2022 came successful conscionable beneath C$0.31. This intends a full-year AFFO of conscionable complete C$0.40 appears to beryllium a given.

That would bespeak nan banal is presently trading astatine conscionable 9.5 times nan AFFO, and it besides intends nan existent distribution of C$0.025 per period is beautiful good covered arsenic nan payout ratio based connected nan recurring AFFO will apt travel successful beneath 75%.

I was besides very willing to spot really nan expanding liking rates connected nan financial markets would effect BTB's FFO and AFFO. The REIT has astir C$632M successful mortgages payable (based connected nan business arsenic of nan extremity of nan 3rd quarter). Fortunately successful excess of 90% of nan mortgages person a fixed liking complaint aliases a floating liking complaint that has been hedged. As of nan extremity of Q3 2022, nan full magnitude of unhedged and floating loans was conscionable C$45M.

Mortgage Maturity Schedule

BTB Investor Relations

This intends we shouldn't spot immoderate abrupt shocks but we should beryllium mentally preparing for BTB having to salary overmuch higher liking rates erstwhile mortgages person to beryllium refinanced. This almanac year, successful excess of C$55M successful mortgages will person to beryllium refinanced and a 150 ground constituent summation would summation nan liking expenses by almost C$1M per year. That's still fine, but past successful 2024 different C$108M successful mortgages (and C$24M successful debentures) will person to beryllium refinanced, truthful we will apt spot a continuous summation successful nan liking expenses complete nan adjacent fewer years. Fortunately these gradual increases bespeak BTB has a bully chance to mitigate nan effect by hiking nan rent. Although this apt intends nan AFFO maturation will beryllium beautiful anemic successful nan adjacent fewer years (if location moreover is immoderate growth), but I americium assured BTB REIT tin debar abrupt shocks - connected nan information it tin support nan occupancy ratio astatine its existent levels.

The book worth of nan assets was C$1.18B arsenic of nan extremity of September, and considering nan NOI was C$18M successful Q4 and we tin apt expect a full-year NOI of C$70M and possibly a mini summation of a fewer cardinal dollar. The weighted capitalization rates for nan assets were established astatine 5.59% for nan business assets, 6.56% for nan agency assets and 6.82% for nan unit assets.

Capitalization Rate

BTB Investor Relations

It's hardly a astonishment to spot expanding capitalization rates successful nan mostly of nan plus classes, but I admit I was a spot amazed to spot nan capitalization rates successful nan business portfolio decreased. When BTB REIT publishes its full-year results, I will beryllium focusing connected nan remaining lease position crossed nan portfolio arsenic I deliberation that could beryllium a cardinal constituent successful determining really charismatic BTB is.

I'm not excessively worried. The sensitivity study indicates that applying a 50 ground points summation successful nan capitalization rate, nan adjacent worth of nan assets would alteration by little than C$90M. And moreover astatine that C$1.09B (which excludes nan effect of rent hikes and a higher NOI).

Sensitivity Analysis

BTB Investor Relations

As of nan extremity of September, BTB had C$10M successful cash, C$630M successful owe debt, C$37M successful slope loans and C$42M successful debentures outstanding. This intends nan nett indebtedness level was C$699M resulting successful an LTV ratio of 59%. And that is nan main logic why I don't person a position successful BTB. Even astatine nan existent payout ratio and assuming C$9M per twelvemonth is retained connected nan equilibrium sheet, nan LTV ratio decreases by little than 1% per year. That's excessively slow and if we would spot a C$90M worth alteration if a higher capitalization complaint would person to beryllium used, nan LTV ratio would instantly summation to 64% and that's alarmingly high.

Investment thesis

The precocious LTV ratio is nan main logic for maine to guidelines connected nan broadside lines. There's a logic why nan banal is trading astatine conscionable complete 9 times nan AFFO. The dividend output is very appealing and well-covered, but I personally conscionable don't consciousness comfortable capable to entertain an LTV ratio of almost 60%. The REIT sold 2 assets successful December for a full of almost C$11M, but it recycled those proceeds to acquisition a C$28M business spot truthful I expect nan LTV ratio to still travel successful astir 60% erstwhile nan full-year results will person been published.

The REIT besides has 2 bid of convertible debentures outstanding but I haven't made a determination yet.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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Editor: Naga

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