REIT Valuation Question - Rise in Value of Industrial Portfolio FY22->FY23 at BTB REIT (TSX:BTB_UN)

[billybobjovialdechicoutimi]

So on October 15th, I asked the board of trustees of BTB to explain the significant implied increase in fair value of the company's industrial portfolio from FY22 to FY23.

The company indicates:

A- on page 14 of its 2022 Annual Report, the Industrial property portfolio is indicated to represent 30% of the total portfolio that year

B- on page 101 in note 4 of the 2023 Annual Report, that the total change in fair value in 2023 of its Industrial Property portfolio was stated to be $32.5mn


Now this increase in fair value, represents 9.3% over the 2022 value (30%x$1,164,881=$349,465), which is quite strange considering that:

1-
Weighted Capitalization rates used by the company for its Industrial portfolio went up from 5.75% end of FY22 to 6.09% end of 2023 (capitalization rates move in the inverse direction as the underlying value, so this is a headwind).

2- 
Colliers Montreal (a major geographic exposure for BTB's portfolio) indicates that from FY22 to FY23, industrial market rents stayed flat and that asset transactions fell by ca. 50%, typically not a good indicator for value. This report is available at this link: 

https://www.collierscanada.com/download-article?itemId=cdf055bd-ad04-42b1-984a-fc2c915e1e94

on this page

https://www.collierscanada.com/en-ca/research/montreal-industrial-market-report-2023-q4




Since the company will not answer me, I was wondering if a REIT expert reading this bullboard would have any ideas as to how this portfolio's value increased so much.

The company claims that its portfolio is continuously valued by 'independent' appraisors, and as we know at the same time, the employment by BTB of the CEO's daughter in a senior role is not considered to be worthy of disclosure in regulatory filings like the Management Information Circular, so obviously the word 'independent' could mean different things to different people.

Any clue what's going on? By all means, check my maths, I could have made a mistake
 

[Morgan]

I’m not a REIT expert. Occasionally things go up in value despite higher rates, but it is rare. 

 

I didn’t check your math, but it might be worth checking if management has incentive plans and what the targets are. It’s possible to boost the values a little bit here, a little there and a little over yonder and pretty soon the portfolio is worth a lot and maybe Wall Street will agree, the stock goes up and top management gets their payout. After all, who is to say a building is worth exactly “x” vs “x” plus or minus 10%? Especially over a 6-24 month period. 

There is also incentive misalignment with the appraisers. If they want to get hired for the next job, it is in their best interest to get close to management’s expectations lest they shop for a different appraiser. The same thing happened at the rating agencies during the GFC. 

 

[mcliu]

Typically REITs just cap NOI, here we see industrial NOI growing, hence higher asset values. But don’t take managements word for NAV cause it is fungible using different inputs.

 

[billybobjovialdechicoutimi]

11 hours ago, mcliu said:

Typically REITs just cap NOI, here we see industrial NOI growing, hence higher asset values. But don’t take managements word for NAV cause it is fungible using different inputs.

 

 

Thanks for that insight @mcliu but that opens up questions on the other two segments then (Retail and Offices), e.g. office NOI dropped by 7.5% in 2023, office cap rates (pa. 100) went up by 26bps to 7.01%, yet the Office portfolio value only dropped by 4.8%, it looks to me like the actual Office fair value drop should be more like a 10% (2x the reported figure), do you follow?

[billybobjovialdechicoutimi]

I also wanted to underline the following discrepancy:

1- In 2023, BTB did not dispose of any property (pages 100-101, note 4 b) of the 2023 annual report).

2- In 2023, BTB bought $36.4mn worth of industrial properties, and it didn't buy anything else (note that 80% of that amount was a building outside Montreal, in Mirabel) - page 100 note 4 a) of the 2023 Annual Report

Now the fair value of the industrial property portfolio went up from:

a- $350mn in 2022 (30% - as stated in the front pages of the AR - multipled by $1,164,881)

b- $440 in 2023 (36.4% as stated in the front pages of the AR - multiplied by $1,207,522)

Now if we were to remove the FV change of the Industrial portfolio over 2023 ($32.5 - explained earlier) and the $36.4mn of new properties they bought in 2023, that leaves an unexplained $22mn increase in the FV of the Industrial portfolio...


Why? How?
 

[mcliu]

Yes, it is difficult to reconcile. That's something you might have to ask Investor Relations.

 

I see the value of office as per chart above decline from $570M in 2022 to $518M in 2023. Around -9% or $52M. But in the annual report, it shows a FV decline of $27.5M

Meanwhile industrial value went from $345M in 2022 to $440M in 2023. An increase of $95M. The property acquisition of $36M and $33M FV increase. There's still $26M unaccounted for. Is it possible they reclassified a property from office to industrial? 

 

Typically these assets are valued individually. Each property will have it's own assessment. The cap rates are essentially a summary of the inputs used. I'm sure the company has the details.

 

 

[billybobjovialdechicoutimi]

10 minutes ago, mcliu said:

Yes, it is difficult to reconcile. That's something you might have to ask Investor Relations.

 

I see the value of office as per chart above decline from $570M in 2022 to $518M in 2023. Around -9% or $52M. But in the annual report, it shows a FV decline of $27.5M

Meanwhile industrial value went from $345M in 2022 to $440M in 2023. An increase of $95M. The property acquisition of $36M and $33M FV increase. There's still $26M unaccounted for. Is it possible they reclassified a property from office to industrial? 

 

Typically these assets are valued individually. Each property will have it's own assessment. The cap rates are essentially a summary of the inputs used. I'm sure the company has the details.

 

 

 

 

Yeah so I found it, page 44

 

"In line with the Trust’s strategy to increase it’s industrial footprint, the proportional fair value of industrial properties increased from 29.6% to 36.4% compared to the same period last year, due to the acquisitions of industrial properties totalling $36.3 million concluded since the said period, a net increase of $32.5 million from fair value adjustments in 2023, and the reclassification of 2 office properties (both flex industrial properties with higher industrial footprint) in the industrial segment representing a total of $26.3 million."

 

Thanks for the help @mcliu, so I guess the question now is how much did the 2 reclassified properties generate in NOI.

 

And fyi, BTB IR, Mgmt, and all the trustees AND all sellside analysts ignore any and all my questions, so sadly that is not a source for answers for me at least... maybe you'd have better luck

[billybobjovialdechicoutimi]

So it looks to me like something is going on with the Saskatchewan portfolio.

In 2021, BTB bought the following 4 properties with a total combined leasable area of 223,472sqft. (all of them in December 2021, so at the very end of the year)
 

3542 Millar Avenue

318 - 68th Street

3911 Millar Avenue

3927 and 3931 Wanuskewin

BTB would have spent a total of $41mn to buy these properties, which on page 8 of the 2021 annual report were reported to be worth $41.1mn.

Now in 2022, BTB did not buy anything in Saskatchewan, and on page 15 of the 2022 annual report, the same 4 properties (with the same total area of 223,472 sqft) were now worth a combined $86mn, so only one year after purchasing these Saskatchewan properties, their value more than doubled...

What am I missing? 
Keep in mind these 4 properties were 100% leased when purchased, so how did they increase in fair value so much?

[billybobjovialdechicoutimi]

scrap that, looks like it was a typo corrected in the 2023 annual report.

[billybobjovialdechicoutimi]

still, its really weird...

Saskatchewan went from 41.1 in 2021 to 44.6 in 2023 (assuming the 2023 AR has no typo) so this implies that the 100% leased industrial properties in Saskatchewan, went up in value by 8.5% over 2 years, and the Colliers Industrial market reports indicate that that market saw industrial rents going up something like 2-5% from FY22 to FY23, so if those top of the line properties went up in value by only 8.5% over 2 years, how did the full Industrial portfolio go up in value by 9%+ over 1 year???

Considering the weakness in the Montreal industrial market?
Considering the rising cap rates?
Considering the fact that the industrial portfolio had 100% committed occupancy at Dec 2022 and 99.9% at Dec 2023?

I am sorry but the NOI increase simply cannot account for that huge FV increase, the only explanation I can think of is that somehow the new Industrial properties (2 purchased with a combined value at purchase of $36mn including one in Mirabel outside Montreal, representing 80% of that) purchased within the 2023 fiscal year, increased in value substantially by the end of the 2023 year, not impossible but kind of weird, no?

[Morgan]

Fuzzy or hard to interpret financials and poor communication from management - seems like something to avoid.
 

There are so many publicly traded real estate stocks. What do you like about this one? 

 

That of course doesn’t mean you shouldn’t ask questions. Thank you for sharing. 

[billybobjovialdechicoutimi]

What do I like about this one? Good question @Morgan

 

 

The CEO of this company sits on the board of the OACIQ - the real estate broker regulatory body in Quebec.

 

Annoyed by my activist efforts and questions at BTB REIT (and at the OACIQ), this gentleman threatened to resign from the board of the OACIQ if the latter did not sue to shut me up at the Quebec Superior Court. Why answer questions when you can sue the guy asking questions to shut him up? Why spend your own money suing to get that guy to shut up, when you can spend the money of others to do so?

 

That legal effort, which has cost unknown thousands (perhaps hundreds of thousands) of dollars to the OACIQ (and the real estate brokers of Quebec) has led to interim Quebec Superior Court rulings forbidding me to share my opinions on the OACIQ (or even OACIQ facts) with BTB unitholders. Comically, the last interim order would remain inforce for at least a year past the BTB CEO having to leave his seat on the OACIQ's board in September 2025 by law anyway and regardless of my annoying questions, since the hearings in our case are slated to be held in Summer 2026 at the earliest.

 

My view is that all of this coming from the CEO of a publicly-listed company is a brazen attempt to silence critics and/or obstruct their analysis. Quarterly earnings calls are reserved for sell-side analysts, who - in case you are wondering - are also ignoring me (trying to stay on the good side of the CEO for lucrative IB work? who knows?). The point is there is no way to get answers from these guys. The good (or bad) news is that there are so many strange things happenings at BTB itself, that there is no need to discuss the OACIQ with BTB unitholders, in order to ask tough questions from BTB's management.

 

Now maybe there are no squeletons in BTB's closet, but obviously if the boy runs to hide when you ask him why there are no cookies left in the jar, you wonder what the boy is hiding, and in this case, they boy has run to hide in the closet, he has put on a fake moustache, and a whig, and is trying to speak in a foreign accent...

 

Since all of this is happening in my backyard of Montreal, if there is indeed fraud, etc. I would prefer for it to be stopped asap, if only to protect the reputation of our local companies/markets. Sino-Forest was not great, Poseidon was not great, let's keep the list as short as possible.

 

 

 

Edited November 3 by billybobjovialdechicoutimi

[Morgan]

@billybobjovialdechicoutimi Fight the good fight man. Those guys are total tools. Hopefully you prevail! 

[Spekulatius]

I am not a REIT expert either, but it’s clear that the disclosure with this trust is quite bad.

 

As for the industrial properties, the math for revaluation posted above seem correct and it looks like there is a gap, but there are a couple of possible explanations for this

1) Cap rates are averages , but the value is the sum of all the property values. It is entirely possible that the NOI and cap rate stay the same but property value goes up if some properties get more valuable for whatever reason. This could be because an area where a property is located gets more valuable and would be evident by assessment from properties in the neighborhood.

 

2) They develop properties in addition to purchasing them. I cannot simply infer that they developed an industrial property form the disclosure in 2023 but it’s possible. They do mention a handful of so of development opportunities in their annual report. Again the disclosure around this is nebulous.

 

What did get my attention is that the disclosure around how they conduct the annual valuation of their assets. It seems that they only really audit the value of ~900M / $1200M (in term do value) of their property, so 300M is based on managment discretion.  Thats one quarter of the value that management has a lot of discretion over how they value them. I think this is quite unusual.

 

Edited November 3 by Spekulatius

[billybobjovialdechicoutimi]

@Spekulatius thanks for that

 

Please note that the 'independence' of the external appraisors is a question mark here too, since the board does not consider the inexistent disclosures to unitholders surrounding its employment of the CEO's daughter in a senior role as a problem. Implicitly it seems to believe the CEO's daughter is 'independent' of the CEO, the Board, etc. How many relatives of Board members are employed by the company? Who knows?

 

I asked the Board who sets her compensation, its terms, etc. but got Nada... including in the Management Information Circular published in May of this year (3 months after writing to the Board on that topic).

 

 

[Morgan]

@billybobjovialdechicoutimi It really seems like you (or someone) needs to go activist or sue them for answers. I hope you can get some results. This kind of management behavior really drives me nuts.