Release Date: May 16, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Canadian Net REIT (CNNRF, Financial) achieved a new all-time high in FFO per unit for Q1 2025, surpassing previous records set in 2022.
- The company successfully reinvested proceeds from the sale of gas station properties into four necessity-based retail assets, enhancing its portfolio.
- A 1.5% distribution increase was announced, marking the twelfth increase since 2012, demonstrating a commitment to rewarding unit holders.
- 97% of expiring leases for 2025 have been renewed with an average rental increase of 6.8%, indicating strong tenant retention.
- The REIT maintains a 100% occupancy rate and a weighted average lease term of 5.7 years, showcasing portfolio stability.
Negative Points
- The transaction market is described as 'prudent,' with a disconnect between buyers and sellers, potentially slowing acquisition opportunities.
- Mortgage rates remain in the mid to high 4% range, which could impact future financing costs and acquisition strategies.
- The REIT's exposure to variable rate debt is limited to its credit facility, which could pose a risk if interest rates rise.
- The company paused distribution increases in 2024 due to higher interest rates and property sales, indicating potential vulnerability to market conditions.
- The acquisition environment is challenging, with not all market opportunities being accretive or actionable in the short term.
Q & A Highlights
Q: The leases are being renewed at quite healthy uplifts. Can you give us a sense of how same property NOI growth is trending and your expectations for 2025?
A: Kevin Henley, Chief Financial Officer: On average, same property NOI grows on a portfolio basis at around 1% to 1.5%. Most of our leases have bumps every five years, resulting in about a 10% renewal increase every five years. Thus, same property NOI tends to be about 1% to 2%.
Q: Are there any properties currently classified as held for sale, and does this indicate that capital recycling is not a priority at the moment?
A: Kevin Henley, Chief Financial Officer: We are always opportunistic about our capital recycling program. While we completed a cycle last year and deployed the capital, we are analyzing the portfolio for opportunities to sell properties and reinvest assertively.
Q: For the 2025 lease renewals, what was the percent of NOI of the four leases you renewed so far?
A: Kevin Henley, Chief Financial Officer: Of the $2.42 million expiring, we renewed 97% of it.
Q: Regarding the 2026 leases, are the rental rates finalized, and can you comment on the spreads for those specifically?
A: Kevin Henley, Chief Financial Officer: The rental rates are not finalized as most are either market or CPI-based. We estimate a safe zone of 5% plus, but will provide more accurate figures in the future.
Q: What is the acquisition outlook, and where are you seeing cap rates, financing rates, and investment spreads?
A: Kevin Henley, Chief Financial Officer: The transaction market is prudent, with transactions taking longer due to a disconnect between buyers and sellers. Mortgage rates remain in the mid to high 4% range. We focus on highly accretive transactions, similar to recent ones.
Q: How are you balancing distribution hikes relative to cash flow growth, especially after flat to negative growth in '23 and '24?
A: Kevin Henley, Chief Financial Officer: We budget a year in advance, and recent acquisitions are accretive to the portfolio and cash flow. The 1.5% distribution increase is a way to reward unit holders, with minimal cash impact on the REIT. The only decrease was in 2024 due to higher rates and property sales, but we are now back to increasing distributions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
