Michel Léonard had a very simple and compelling strategy when he founded BTB Real Estate Investment Trust (BTB.UN) more than five years ago. Focus on the province of Quebec, a place real estate companies had overlooked or discounted, resulting in a market full of bargains.
“It has not an area that has been canvassed by other REITs in order to purchase,” said Léonard, who is BTB’s President and Chief Executive. “There are still only two Quebec-based REITs. We know that we can still buy in Quebec at a lower price than if we were to buy in suburban Toronto.”
Established in the fall of 2006, BTB’s founder knew that Quebec focus armed his REIT with a much-needed advantage. “Given that our cost of money is higher than the larger REITs, we have to acquire great properties in markets where the cap rates are higher than in other areas of Canada.”
BTB’s costs of funds are roughly 9%, Léonard said, while some REITs enjoy financing in the 5% range. “It is a question of size, it is a question of maturity.”
Fast Growth in the Plans
BTB’s recent vintage has not slowed its torrid acquisition pace. After making its first acquisition in early 2007, the REIT was stopped in its tracks by the recession and didn’t resume acquiring properties until 2010.
Today it has total assets worth approximately $360 million and wants to grow to $500 million by year end and continue to expand its asset base from there. “We can grow in the suburbs of Ottawa for sure and any suburb of Montreal. There are still a lot of areas that we don’t cover very well,” the BTB president said.
Geographically, BTB’s holdings are concentrated around Quebec City where it owns one million square feet, the suburbs around Montreal and in the surroundings of Ottawa where it has 500,000 square feet.
“Where we are buying is in primary and secondary markets outside of say downtown Montreal,” he explained. “They are not buildings that are known but they are great buildings, class A and class B buildings, within those markets.”
BTB currently owns 3.3 million square feet of property split between commercial, industrial and retail real estate properties. Ideally it would like the holdings to be apportioned equally, although right now it has a mix of 40% office, 30% industrial, 20% retail and the balance in a Quebec-specific category it calls “mixed,” buildings which feature retail on the ground floor and offices above it. “We feel that we have to diversified…to have sort of a balanced portfolio.”
BTB’s Low Profile is Reflected in its Price
If there was something that BTB would like to change, it would be to raise the low profile that it has with investors and ultimately the price of its units. BTB is “a little too much under the radar if I can put it that way,” said Léonard, a lawyer who got into the real estate business in the Nineties and was a broker most recently with Colliers before starting the REIT.
“The price of our units are in my opinion definitely below par so as people come to know our story I think there is a lot of room to grow there.”
The REIT’s units (BTB.UN) currently trade around 90 cents per unit on the TSX Venture exchange.
Strengthening Financial Picture
Earlier this month BTB released annual financial results which show improving financial measures for the REIT. They include:
• Occupancy rate up from 90.0% to 91.1%.
• Mortgage debt ratio down from 69.5% to 59.3%.
• Fourth straight financial year of lower weighted average interest rate on mortgage loans – down 35 basis points to 5.27% in 2011.
• 36.9% increase of unitholders’ equity in 2011.
• 19.8% increase in rental revenue.
• 14.2% increase in net operating income.
• 22.6% increase in total assets, from $293 million to $359 million.
• 14.1% increase in leasable area, from 2,857,400 square feet to 3,271,583 square feet.
Since its year end BTB raised $17.3 million through a bought deal sale of units which will be allocated to future acquisitions of