BTB Real Estate Investment Trust (OTC:BTBIF) Q2 2022 Results Earnings Conference Call August 9, 2022 10:00 AM ET
Company Participants
Michel Léonard – President and Chief Executive Officer
Peter Picciola – Vice President and Chief Investment Officer
Mathieu Bolté – Vice President and Chief Financial Officer
Conference Call Participants
Tom Callaghan – RBC Capital Markets
Matt Kornack – National Bank
Gaurav Mathur – iA Capital
Chris Koutsikaloudis – Canaccord
Operator
Good morning. My name is Sylvie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BTB Real Estate Investment Trust 2022 Second Quarter Results Conference Call for which management will discuss the quarter ended June 30, 2022. [Operator Instructions] Should you wish to follow the presentation in greater detail, management has made a presentation available on BTB’s website at www.btbreit.com/investorrelations/quarterlyandmanualmanagementpresentation.
[Operator Instructions]
Before turning the meeting over to management, please be advised that some of the statements that may be made during this call may be forward-looking in nature. Such statements involve numerous factors and assumptions and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Several important factors could cause BTB Real Estate Investment Trust’s actual results to differ materially from the expectations expressed or implied by such forward-looking statements. These risks, uncertainties and other factors that could influence actual results are described in BTB Real Estate Investment Trust, management discussion and analysis and it’s in annual information form, which were filed on SEDAR and on BTB’s website at www.btbreit.com. I would like to remind everyone that this conference is being recorded. Thank you.
And I would like to turn the conference over to Mr. Michel Leonard, President and Chief Executive Officer; Mr. Mathieu Bolte, Vice President and Chief Financial Officer; and Mr. Peter Picciola, Vice President and Chief Investment Officer.
Mr. Leonard, you may begin the conference.
Michel Léonard
Thank you, Sylvie. Good morning, everybody. We are very proud of our results that we have published last night for Q2 2022. We’ve shown a solid organic growth as far as same property NOI grew by 8.2%. Strong operating performance where we concluded lease renewals and new leases for 122,000 square feet and the robust leasing activities basically landed at 93.8% of committed occupancy and that had very positive rent spreads.
We are now sitting with 5.8 million square feet under management — or ownership, I should say. And the flight to quality that we undertook back in 2017 is basically paying off today.
We still concluded in this market, three acquisitions of industrial properties. We acquired a property in Ottawa, a property in Vaudreuil in the province of Quebec and a proudly on Allard Avenue in Edmonton. We disposed a very small property for $1.8 million, a property that was slated for disposition for quite a while.
The total value of our investment properties surpassed $1.1 billion. And for the quarter, we collected 98% of our rents. Our recurring FFO sat at $0.114, total debt ratio at 58.8% and our recurring AFFO payout ratio at 76%.
We’re operating largely in the province of Quebec, where we’re seeing a strong economy that surpassed other provinces post-COVID. The 2021 Quebec GDP growth is 5.6%. That surpassed Ontario that was at 4.6%, Alberta at 5.1% and the Canadian average at 4.2%.
The unemployment rate in the province of Quebec is 4.3% and amongst the lowest across the country. In Montreal, the industrial rent average is $10.41, increasing, compared to Toronto at $14 and Vancouver at $18.
The rebound in Western Canada with our recent opportunistic industrial acquisitions, specifically in Edmonton has really paid off for BTB. We’re seeing lower cap rates for warehouses compared to the rest of Canada. A significant absorption in the past months with vacancy rates sitting at 4.65%, and Saskatoon also shows favorable opportunities in the industrial sector, considering its limited supply.
There is limited short-term financing requirement for BTB, only 10% of our debt remaining to be refinanced in 2022 and 2023. So we refinanced new — refinanced or concluded new mortgages during the year 2020 and the year 2021 for a total of 49% of the mortgage debt at very advantageous interest rates with a remaining WALT of 4.5 years as at June 30, 2022.
There is a limited impact for 2022 regarding the increasing in interest rates with $125,000 of interest charges — additional charges and we forecast that for 2023, the additional charges based on the current rate offered to us would be $850,000 for the year. Our portfolio has shown its resiliency with improving occupancy rate and strong performance amongst the 3 asset classes that we own.
The occupancy rate, as I mentioned earlier, 93.8%. So that’s 1.6% higher than Q2 2021 and 0.7% higher than Q1 2022. Our collection rate throughout the year was 99%. The investment property year-over-year growth was 27%, and our average cap rate above 6%. We have 17 properties that were acquired for an aggregate value of $246 million and a total of 941,000 square feet.
Six properties were disposed for an aggregate total value of $32 million and totaling 499,000 square feet. We have an attractive distribution yield and it’s adequately covered by the payout ratio. Our IFRS NAV stands at $5.42 per unit. It was at $5.51 in Q2 2021 versus a current market price of $3.60. Yes, I did see that yesterday, we were up past $3.70. And that’s a discount of roughly 30%.
And our fully diluted NAV is $4.85 per unit, and it was $4.80 in Q2 2021. The distribution yield is right now or around 8% and the AFFO payout ratio shows an improvement at 72.3% for 2022 year-to-date and 77.9% for the year 2021.
With this, I’d like to ask Mathieu — excuse me, Peter, to go through the leasing activities and the investment activities.
Peter Picciola
Good morning, everyone, and thank you for being on the call. It’s my pleasure to be on this first call with BTB. My name is Peter Picciola, and on a day-to-day basis, I’m working on the investment, disposition and leasing activities for the firm.
Very pleased with our activities in Q2 and activities year-to-date. Broadly speaking, I’ll give you a look at what those activities entailed, and I’ll start with the leasing activities. In Q2, we have completed approximately 122,000 square feet of leases renewed or new leases being completed, bringing our activities to 315,291 square feet year-to-date. Large line items there secured long-term leases with groups in Ottawa, Quebec City and Montreal, predominantly. Quebec — the city of Quebec in Quebec City renewed its lease for 23,500 square feet.
TÜV SÜD, a diagnostics company that’s almost 155 years old, renewed its lease in Ottawa for approximately 27,730 feet and Keysight Technologies renewed its lease for 7,500 feet of office space in Montreal, great note in these renewals is they are all on average, longer-term leases than what our average WALT is today. So that number continues to grow closer and closer to six and pushing past six. And perhaps the greater importance, some of the pricing power we have in some of these markets have allowed us to increase our average renewal rent by almost 21%, all classes of assets combined.
We are finalizing some construction work in Quebec at our property on FX Sabourin, waiving conditions with the flights of the Lumen. And I know that there was some concern historically about the performance of this property. We’re pleased to win out of that property has been committed to 100%. And so we consider it fully leased with occupancy having taken place. And the forecast for the future looks also bright.
We’ve got a pipeline of activity that is solid. And at this particular time, we can confirm that we’ve got a solid 36,000 feet of conditional deals that we feel are going to be able to close in Q3. So more positive news to come on the next call.
On the investment side, as Michel has previously mentioned, we’re finally now up to 75 properties of over 5.8 million square feet, pushing up against the $1.2 billion asset level, although we’re not quite there, standing at around $1,185 million. The acquisitions made in Q2 and throughout the first part of the year largely being single tenant industrial 100% leases certainly help positively in terms of our committed occupancies. And a greater note is we keep buying these assets on yields that are accretive and therefore, not diluting unitholders.
At the same time, we continue our disposition strategy of noncore assets, having disposed recently of the small property in Magog and in the townships of Quebec. And we have 2 more in the pipeline, non-core smaller-sized office assets. The addresses are 5878 Sherbrooke East and 8183 [indiscernible], a combined 45,000 feet of office space that we believe we’ll be able to chip close in either Q3, but more likely in Q4.
A brief note on our efforts to densify some of the sites we have in our portfolio. We had previously identified somewhere between four and six sites. I think that number today looks more like between five and seven, possibly more. There is one that is very well advanced. We have been working very hard with urban planner, architect, designer and the city officials.
So far, we are getting constructive positive feedback in terms of what we’re doing. And the green lights certainly are there for us to continue. We believe, based on the discussions we’ve had with the city that we should be very close to a zoning approval by the end of Q4 2022. And if all goes well, we should be shoveling the ground in the fall of 2023.
As it pertains to some of those other sites, we’ve engaged with some professionals, particularly urban planners for one part of town, in particular. And we’ve recently had confirmation that our thoughts were correct.
There are definitely possibilities on some of these retail sites where we believe we can densify and change or add to the location of some of these properties, which takes me to Slide 8 for those of you that are flipping the pages, just a brief overview as to where we stand in terms of our portfolio composition. We now stand at 27% industrial portfolio. All these statistics are based on square footage, 49% in the off downtown core office and 24% in the necessity-based retail. The largest move is coming obviously in the industrial asset class given the acquisitions we’ve made in Quebec and predominantly across the rest of the country in the last six months.
And by geography, we are at 54% in Montreal, 24% in Quebec City, 14% in Ottawa, 4% in Saskatoon and 4% in Edmonton. So we are definitely on a push to diversify the geography and we’re — our execution of acquisitions and dispositions is going to be reflected over the several next quarters as to how our portfolio is comprised. And so with that, I’d like to turn the microphone back to — or rather to Mathieu Bolte, our CFO. Thank you.
Mathieu Bolté
Thank you, Michel and Peter, and good morning, everyone. So we’re pleased with the results and the accretive effect of the recent acquisitions with the occupancy rate up 160 basis points versus a year ago, with our industrial portfolio now leased at 100%, and the necessity-based retail portfolio showing increases of 3.3%. The composition of the portfolio has to evolve with now more than 23% of our net operating income coming from the Industrial segment. It’s an increase of 9% compared to a year ago and a decrease of the necessity-based retail net operating income from 32% to now 22%.
As we compare results to last year, let’s recall that in Q2 last year, we had a retrospective additional recovery of $2.3 million and an indemnity of $0.3 million for a total of $2.6 million as we disclosed in the Q2 2021 in D&A. So for this quarter, revenues were up 11.3% at $29 million. Excluding last year adjustments, revenue was up 23.7%.
Let’s just mention some of the acquisitions that Peter and Michel just mentioned, 2 were closed at the end of June. So they’re not yet material for the second quarter and they will come fully accretive starting in the third quarter. Net operating income was up 13% at $17.6 million, and as well, excluding the last year adjustment, net operating income was up 35.6%. Same-property NOI increased by 8.2% for the quarter and 5.1% year-to-date because of the positive occupancy increase and the lease renewal rates and the good — the strong effort that has been put there to increase the occupancy rate.
Recurring FFO was $0.114 per unit for the quarter compared to $0.125 per unit for the same period in 2021. So it’s a decrease of $0.011 per unit. But again, excluding last year adjustment, recurring FFO per unit was up 23.6% for the first six-month period or 27.2% for the second quarter only. Cumulative AFFO payout ratio was at 68.3%, slightly up by 4.6% compared to the same period last year.
Looking at capital structure, the Trust concluded the quarter with a total debt ratio of 58.8%. It’s an improvement of 1.7% compared to the end of last year. Following the bought deal completed on March 30, the Trust used $31 million to repay the revolving credit facility on April 5. And since then, $19 million has been used to finance the recent acquisition.
Weighted average interest rate for mortgages was at 3.62%. So it’s an increase of 10 basis points compared to last year, as a consequence of some recent refinancing. But just keep in mind, it’s still 30 basis points lower than the pre-pandemic level. For the last six months of 2022, the Trust has $42 million of mortgages coming to maturity, of which $18 million has been already refinanced in July, leaving $24 million for the rest of the year.
One thing that we added as part of the conference call presentation, it’s a page just considering the current interest rate environment that shows the property and the impact of the coming refinancing for 2022 and also 2023. So we break it down by maturity for the coming 18 months. And what we conclude is the FFO impact is estimated to be $125,000 for this year. And when we sum up the refinancing of this year plus the one of next year, we believe that by the end of next year, based on current rates, the impact would be around $853,000. So it’s about $0.01 per unit on an AFFO basis.
Okay. So this completes our presentation. And with that, we’ll move to the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question will be from Tom Callaghan at RBC Capital Markets.
Tom Callaghan
Just looking at the acquisition and disposition side of things, can you maybe talk about any of the changes in underwriting or bid out spreads that you guys have seen kind of perhaps over the last three months, just given the volatility in yields?
Peter Picciola
Thanks for your question. Listen, there’s no question that pricing expectations on the vendor side have adjusted, perhaps not as much as one would expect when you’re out there trying to buy. But having started here four months ago, I think the spreads that we saw four months ago to the spreads we see today have — those gaps have increased tremendously. But I would say that pricing has adjusted so there are still accretive deals out there for us, though quite not as much as how much the rate per financing have moved. So no question, the market has been adjusting certainly in the industrial asset class to recognize that the financing environment is no longer the same.
Having not executed any trades on the retail or office side, it’s tougher to say. Although based on the guidance we’ve gotten on some of the opportunities we’ve looked at, those vendors are also recognizing that the environment has changed a little bit.
Michel Léonard
If I may add also the property is that the office properties that we have put on the market are the results that we are getting from the marketing is that the cap rates that we have as our IFRS appraised values are in the market. So as far as these properties are concerned, we don’t see any material impact with rising cap rates as a result of our conservative nature of our business when we do appraise our properties.
Tom Callaghan
Got it. And then just on those properties, the ones you mentioned there in terms of the potential for disposition kind of later this year, is there any kind of high-level proceed expectation across those 2 properties?
Michel Léonard
Well, just — we’ve identified seven properties that we want to put on the market, two of which are well advanced. The others are going to hit the market probably in early September after Labor Day. And so — and our purpose is going to be to — I mean, call it, state of space in the sense that we’re not raising funds in the market in order to purchase properties. So we are selling properties in order to redeploy capital. So we do expect that we’re going to have a material amount of money in order to redeploy the capital into the industrial segment.
Tom Callaghan
Got it. And then just last one for me, but it looks like another very strong quarter in terms of leasing and obviously, on the spread. Interested in your color on kind of go-forward outlook there in terms of spreads and how that all kind of ties into occupancy at a high level maybe to the end of the year.
Peter Picciola
Well, look, I think there’s lots of room to run still on the industrial asset class. I think based on what we’ve seen so far, the rebound in retail leasing is really, really encouraging. I think people are voting with their feet, if you indulge me. And then I think the jury is still out on what hybrid will be and what work from home and what natural impact that will have on the office market, broadly speaking. But I do think all things considered, if you’re connected to transit and you’re in a suburban office, you’re more than likely to have access to a free parking spot and a shorter commute. So I think we’re well positioned come with me.
Operator
And your next question will be from Matt Kornack at National Bank.
Matt Kornack
Maybe a quick — maybe a quick follow-up to the prior question, Peter. With regards to mark-to-market potential. Can you give us a bit of a sense? I mean, obviously, as was noted, the office spread is quite high. I assume there’s some tenant specific or space specific things there. But if you can tell me otherwise, what the mark-to-market would be office portfolio as well as it seems like retail has been fairly consistent. We haven’t seen much in the way of industrial leasing from you guys, but your thoughts there as well.
Peter Picciola
So I’ll start backwards. I mean on the industrial leasing, the portfolio is basically 100% leased and occupied. So tough to get rental growth when you don’t have any turnover. On the retail, I think we’re seeing rates that are consistent with our valuations and in some cases, without giving too much away, we are seeing rental increases in the high single digits, sometimes double-digit rents. On the office side, I think the growth is going to be there, but it’s going to be lower single digits than anything else. What we’re finding is that in some situations, again, with pricing power and then given the high cost of construction, you’ve got some tenants with a fair amount of inertia that are happier to renew in place, possibly pay a premium because to remain competitive and relocated is much, much tougher.
So I think that’s the way it’s shaking out for the rest of the year. And so far, that’s what the results bear out in terms of the activities we’ve been able to execute and the pipeline of activities and discussions we’re having with all the users in the different asset classes.
Michel Léonard
To provide a little bit more color, we’ve said that we lost a tenant in — an office tenant that was located on the Saint-Laurent Boulevard, probably dead center on the island of Montreal, very close to Little Italy. And this tenant has relocated to downtown. So it seemed to us that the activity as far as the determination to occupy, I think, is there. we’re seeing new leasing. We’ve concluded the leasing with the accounting firm, MNP in Laval, a substantial deal in two phases, the first phase being 14,000 square feet.
The second phase being close to 9,000 square feet. And the second phase was basically conditional upon us being able to relocate or cancel leases for certain tenants. So there is, in the suburban environment, there is a flight back to the office.
As far as retail is concerned, we’ve lost a little bit because this property that we have under development that we are seeking the new zoning from the city, it’s very difficult when you’re in a redevelopment mode to conclude new leases or even to be in the market in order to conclude new leases because the future is uncertain. So as a result of that, in that center, we’re not actively recruiting new tenants, although as we’re going to get the permission to redevelop, then we are going to hit the market really hard, and there’s going to be, in our opinion, high demand for it.
In Levis, in suburb of Quebec City, we have concluded a deal with Bath & Body Works, which is, again, retailers returning to the physical stores. And with this, there’s a substantially and a well-known retailer that is following the footsteps of BBW. And as a result of this, we are in heavy discussions or discussions that are going to land to — are going to end with a signed lease for another 4,000 square feet from, again, a very, very well-known retailer. So we’re seeing activity — and we’re also seeing in our centers that the sales are back to not only to pre-COVID areas or time, but it’s surpassing the sales that they had pre-COVID. So we’re very confident on the portfolio and its performance.
The properties we have, as you know, our ad office is located in downtown Montreal and we have one floor that’s available. That’s not a lot. It’s 6,000 square feet, but we have absolutely no activity. Whereas in all our suburban environments, we do have activities. So I think that there’s a big disconnect between the two.
I think that there is going to be an effort by the large tenants that are occupying space in the downtowns Canada in order to get their employees back at work. But there is a definite trend that we’re seeing where the employees want to go back to work, but not necessarily in the downtowns. They don’t want to commute. They basically are past the moment where they commuted in the past. So they just want to go back to work, but be working close to home. That’s what we’re seeing.
Matt Kornack
Okay. No, that’s fair enough. The other thing I noticed, you bucked the trend a bit on CapEx. It was actually quite low this quarter, notwithstanding fairly active leasing. So — are you seeing that you’re not having to pay additional tenant incentives or leasing costs as a result of the current environment? Or is that just a quarterly anomaly?
Michel Léonard
I think that it’s — it’s probably — there’s two things that I think come into play here. When we were at 89% occupancy, we did a bunch of leasing and that brought up — brought us up to the 93.8%. So that was capital intensive. Now for us to go to 94%, I think it’s not significant. And I think it’s going to taper off. But I don’t think that this quarter is a testimonial to what’s going to happen, but I think that the amounts are definitely lower than the past years.
Matt Kornack
No, that’s helpful. And it seems like — and maybe Matthew, you can elaborate, but this seems like a pretty stable quarter, nothing onetime in nature, a fairly good start base unless, I guess, one thing maybe you can comment on is kind of where you see occupancy trending through the balance of this year and into next, but all things considered, there’s not much onetime in nature in the print?
Mathieu Bolté
That’s right.
Matt Kornack
And then on the occupancy front, I mean, 94% committed 90% in place. Should we expect that 94% to hold and the in-place number to track in the direction of committed? Or how should we think about occupancy longer term?
Michel Léonard
Well, we know that in Quebec City, we’re losing at the end of the year, a large tenant, not because they don’t want to go back to the office, it’s just because — it’s part of Industrial Alliance and they’ve decided to regroup all their employees under one roof in a different way of space using — usage. So — but we also know that we have a pending deal, as you will remember from our Montreal property in [indiscernible], where we’re waiting for the city of [indiscernible] to get off there, you know what, in order to give us the right zoning in order for us to start the building process for Giant Tiger for 26,000 square feet. So I think overall, losing one and having an additional one, I think that generally, we should trend in the 93%, 94%.
Matt Kornack
Okay. Perfect. And last one for me on the density that is being built. Is that, I would assume it’s condo strata from a zoning standpoint. But is it supposed to be rental or condo. I know Quebec has held in better than the GTA in Vancouver in terms of housing prices, but just thoughts there on what you’re building?
Michel Léonard
The residential developer is going — we’re talking about six towers in total and four are going to be rental and two are going to be condos. And generally, we’re talking about just to complete — we’re a little bit less than 950 units. So bringing on the site, let’s say, the 1,500 to 2,000 new people on our site. And that’s where the excitement lies as far as the retailers are concerned.
Operator
[Operator Instructions] And you next question will be from Gaurav Mathur at iA Capital.
Gaurav Mathur
A few questions on my list, and I’ll begin with the first one. So firstly, on office. I noticed that occupancy has basically remained unchanged compared to the last quarter as well. Given all the drivers that are working for the portfolio, how should investors think about occupancy levels across office in the second half of the year and maybe even over the next 12 months?
Michel Léonard
I think our office portfolio is largely affected by one property, which — and that’s why when we publish the numbers, where we say we’re a little bit less than 90% occupancy in the Quebec City area. If we take out the Three Rivers property, then we’re at 91.2% from memory regarding the Quebec City area. So we are breaking our heads, our brains, I should say, in order to figure out what to do with this Three River property. Obviously, we could put it on market, and I think that would be takers. There’s — we’ve never talked about the development of this property, but there’s vacant land that we could basically find a solution on the residential side with a residential developer. And I think that there would be demand for that type of product.
But it’s not an easy resolve. And unfortunately, when we look at our statistics for Montreal, Ottawa, Quebec City without Three Rivers, you’ll see that our numbers are quite good. And so unfortunately, we are in a bind in Three Rivers, and we have to find a way out.
Gaurav Mathur
Okay. And just switching tracks here on renewal rates. I’d say cumulative averaging 15% is quite strong across all business segments. How does that pan out for the rest of the year as well? And how should we look at this number going into — going towards the end of 2022 and the beginning of 2023?
Peter Picciola
So I think that the last quarter, achieving in excess of 20% or rather 21, bringing the average to around 20.6% and then 15% for the first half of the year. I don’t believe that’s something that we can continue to expect for the rest of the year. I certainly think that we will be in a position to talk about lower double digits, and probably heading into next year as well. But I don’t think that rental growth of 15% to 20% for renewals is sustainable, not of the price points that we’re looking at.
Gaurav Mathur
Okay. Fantastic. Just one question on industrial. I know that right now you’re 100% leased. But as my understanding is there will be some lease up for renewal in 2023. What sort of mark-to-market expectations do you have when those leases come up for renewal?
Peter Picciola
Well, look, we expect them all to increase in a material fashion between the opportunities in Quebec and in Western Canada, we are poised, we think, to see real important material rental growth in the industrial asset class as well. Just to give you an example, without mentioning names, we secured the renewal in Edmonton — sorry, in Saskatoon for a tenant, they were paying $9. And we increase it to $11.50 — so we increased the net rent to $11.50.
Michel Léonard
So it’s better than what we had forecast when we acquired the property.
Gaurav Mathur
Excellent. And just staying on the industrial front, and you discussed this earlier on the call, you are finding attractive opportunities as well. Obviously, financing is proven to be difficult across the board. Just given the current market dynamics, how are you thinking about capital allocation on acquisitions and development versus maybe even thinking about buying back your stock given the discount NAV.
Michel Léonard
Well, when we talk about that we — there are two things. I think that there’s a big disconnect between buying back your stock and growth. So I think that there’s a mixed message that is basically outlined. We are — we want to — we want to continue our growth, find ways in order to do so and grow into the Industrial segment. As you noticed, we have not made any favorable market value adjustment yet in our portfolio. And the reason being that we cannot just do a blanket adjustment, and I’ll explain why. We — the portfolio that we purchased in last December in Edmonton and Saskatoon, we purchased the portfolio at a 6.9% cap rate. Cap rates in Edmonton and Saskatoon have reduced over time, basically below, say, 5% — 6%, just like just for argument’s sake, and it’s probably 5.8%, 5.7% right now.
So if we were to add just gleefully, 20 basis points to our industrial portfolio, then we would basically really inflict damage to ourselves because then all of a sudden the portfolio would be a 7.1% cap rate, whereas the adjustment should be done at a 5% cap rate plus 20 basis points to 5.9%. So we’re still conservative in our books. So what we’ve decided on that front is that together with Altus, we are going to go through a significant amount of our portfolio during Q3 in order to assess if our fair values, our IFRS fair values are in line with the, let’s say, the new reality of the market.
Are we still conservative? Or should we make an adjustment? So we’re going to go almost property by property in order to do some the exercise, and then we’ll report back because we don’t want to be penalized because we purchased assets at a decent price or not aggressively. We’ve never bought a property, let’s say, at a 3.5% cap rate. And so if we were to just basically blank — in a blanket fashion, just add the certain percentage to the cap rate, I think it’s just penalizing ourselves.
We’re just basically committed [indiscernible] all of a sudden. So it makes no sense. So we’re going to do it methodically and we’re going to report back on that front.
Peter Picciola
Michel, if I could just add, Gaurav. We’ve talked about this, and we believe that there are better buying opportunities out there for our unitholders and the performance than simply canceling units. And so I think that the valuation is where it is for a bunch of reasons that are beyond our control, this is impacting the REIT sector, diversified or otherwise. It’s temporary. But that being said, save real estate operators, we see opportunities with rental growth and potential eventual cap rate compression.
I mean we have to be here every 90 days, talking to all of you folks, letting you know what we’re up to, but we think longer term, it’s a better play for us to invest in real estate that’s got opportunities to grow in value and generate better than risk-adjusted returns as opposed to a sort of a technical financial transaction and buying back units.
Operator
Next question will be from Chris Koutsikaloudis at Canaccord.
Christopher Koutsikaloudis
Just a couple of quick ones here from me. Maybe this one is for Mathieu. Wondering if you can expand maybe give a little more color on what drove the decline in same-property operating expense year-over-year.
Mathieu Bolté
Well, there is different things. Last year, we spoke about the project we put in place to improve our recoveries and overall expenses and having a better grass on those, and that’s something we realized. We did as well put in place a procurement function, centralized procurement function to get additional volume discounts pulling some of the portfolio together with some of the suppliers to cut that down. So it was on different fronts. We’ve been investing in energy projects as well. And so that’s most of it. We don’t see — it’s not a major reduction, but I think it’s going in the right direction.
Michel Léonard
And if I can add. I think that the slide to industrial properties reducing our weight in the office properties and going towards the investment in industrial properties is also helping. Because, as you know, it’s less expensive to carry an industrial property than it is an office property or a retail property also.
Christopher Koutsikaloudis
That’s great color. Appreciate it. And then just circling back on the comments on cap rates. Do you think there’s enough transaction activity in the market today to be able to really assess where cap rates are or where they’re moving.
Michel Léonard
The answer is no.
Christopher Koutsikaloudis
So it’s going to be a difficult exercise then, I guess, to try and value your portfolio more comprehensively next quarter.
Michel Léonard
Yes, yes. But so far, for instance, in the office segment, there has been very few — in our markets, very few transactions. We know of some that are in the market. And we’re not bidding for any office property currently.
Operator
And at this time Mr. Leonard, we have no further questions. Please proceed with your closing comments.
Michel Léonard
Thank you, Sylvie, and thank you everybody for your participation this morning. I think that the quarter, there’s been numerous quarters of improvement for BTB since, I would say, 2019. And now we’re seeing the fruits of all the efforts that have been invested by BTB in personnel, staff and so on, even trustees and this flight to quality that we started way back in 2007 when we had decided to basically rejiggle the portfolio. We’re looking at very strong operating performance. The leasing activities are robust.
We have healthy fundamentals in retail, in industrial and even in the off-core office segment. As I mentioned earlier, we’re not acquiring properties in order to raise eventually capital. We’re sitting on our hands on that front. We want to make sure that we don’t hinder the stock price and the ways that we’re going to go about the deployment — the deployment of capital is basically by selling certain assets not because they’re not performing. It’s just that they’re not performing enough for us as compared to the other ones that we own.
So there is going to be a great acquisition potential for certain smaller investors. And as far as we’re concerned, most of these properties are going to be sold at a profit.
So — and the redeployment of capital, as I mentioned earlier, is going to go towards industrial properties, and it’s going to be proceeds from this position. So we are not successful in dispositions. We’re not going to acquire properties because that’s where the money is going to come from. I talked about — we talked about the material impact of rising interest rates on BTB where we saw that this year it’s going to be very slight.
And next year, we’re talking about less than — around $800,000 based on the current environment. So if the environment improves, then all of a sudden, we’re going to see a lessening of this amount that we put forward this morning. And as far as the adjustment to fair value, we talked about it. We are going to look at it on a property per property. But we don’t anticipate that there is going to be a lot of movement on that front.
As a result of the fact that we have — number one, we haven’t been aggressive on our acquisitions regarding cap rates. We have been on the contrary, probably more disciplined on that front. And as a result, we believe in the value of our portfolio.
So with this, thank you, again for your participation. It’s been a great quarter or a great many quarters since 2019 for BTB, although we went through the headwinds as others have as well. And we’re very happy with the performance, very happy with where we stand. So again, thank you very much, and we’ll see you or speak to you for the next quarter in November. Thank you.
Operator
Thank you, Mr. Leonard. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Have a good day.
Be the first to comment