Canadian Net Injects $4M in New Capital for Growth Amid High Leverage

MONTREAL, QC – December 01, 2025 – Canadian Net Real Estate Investment Trust (TSX-V: NET.UN) has announced the closing of a $4.0 million private placement of unsecured convertible debentures, a strategic move designed to fuel acquisitions and fortify its balance sheet as it navigates a complex market environment. The financing provides the REIT with fresh capital but also highlights the rising cost of debt faced by the entire real estate sector.

Decoding the Debenture Deal

The new financing, which was non-brokered, consists of convertible debentures maturing on December 1, 2030. The terms reveal much about the current financial landscape for REITs. The debentures carry a 7.0% annual interest rate, payable semi-annually. This rate is notably higher than the average marginal funding cost of approximately 5.7% that Canadian Net reported earlier in the year and sits at the higher end of the typical 6% average for similar instruments in the Canadian market. This premium suggests that investors are demanding higher returns to compensate for perceived risks, including the company's existing leverage and the broader economic climate.

"We are pleased to announce a $4 million convertible debenture financing, which will support Canadian Net’s continued growth," said Kevin Henley, President and CEO, in the official press release. He noted the REIT's recent history of repaying over $9 million in debentures while executing a "meaningful growth" strategy through its capital recycling program.

The debentures are convertible into Canadian Net units at a price of $6.75 per unit. With the REIT's units trading around the CA$5.57 mark prior to the announcement, this conversion price represents a significant premium, making immediate conversion unattractive for investors. However, should the unit price surpass this threshold, it offers a path to equity conversion. If fully converted, the debentures would issue approximately 592,592 new units, resulting in a potential dilution of just under 3% for existing unitholders. The REIT also has an option to redeem the debentures after December 1, 2028, if its unit price consistently trades above the conversion price, giving it a tool to manage its capital structure proactively.

A Balancing Act: Fueling Growth While Managing Debt

The primary purpose of this capital injection is twofold: to pursue growth and manage existing financial obligations. The net proceeds are earmarked for acquisitions, repayment of outstanding debt, and general working capital. This dual focus is critical for Canadian Net, which operates with a significantly leveraged balance sheet.

As of early 2025, the REIT's debt-to-equity ratio stood at a high 129.4%, with net debt comprising 62% of its enterprise value. Furthermore, its interest coverage from earnings before interest and taxes (EBIT) was a modest 2.7x. This new debenture adds to the overall debt load but is also a crucial tool for managing it. A portion of the proceeds will likely be used to address upcoming maturities, including a $6 million convertible debenture with a 6% coupon set to mature in November 2025. Given the current unit price is well below that debenture's $8.13 conversion price, it is expected to be repaid in cash, making this new financing timely.

This move aligns with the company's stated goal of gradually reducing its debt-to-enterprise value ratio to below 50% by 2033. The strategy relies on retaining cash flow, supported by a low payout ratio, and generating steady rent growth. However, the REIT, like its peers, faces the headwind of refinancing legacy mortgages. Many of its older mortgages carry very low interest rates—some as low as 2.31%—and as they mature, they will be replaced with debt at current, higher market rates, inevitably increasing overall interest expenses. This $4 million debenture, with its 7.0% coupon, is a clear indicator of this new, more expensive reality.

A Resilient Strategy in a Discerning Market

Despite the financial pressures, Canadian Net’s operational strategy remains a key strength. The REIT focuses on acquiring and owning high-quality, triple-net, and management-free commercial properties. This model insulates it from many operational costs, as tenants are responsible for taxes, insurance, and maintenance.

More importantly, its portfolio is heavily weighted toward "necessity-based" retail. Its key tenants are investment-grade giants like Loblaws, Walmart, Metro, and Sobeys, alongside a collection of convenience stores and fast-food restaurants. This focus on essential goods and services provides a defensive moat, ensuring stable rental income even during economic downturns. The REIT has successfully maintained a 100% occupancy rate, a testament to the strength of its assets and tenant base.

The new capital will allow Canadian Net to continue its proven acquisition strategy. The company has been active, acquiring multiple properties in Quebec and Nova Scotia in 2025 and optimizing its portfolio by selling off certain assets to fund new purchases. Recent acquisitions have already contributed to an 8% year-to-date increase in Funds From Operations (FFO) per unit. This financing gives management the dry powder to capitalize on what CEO Kevin Henley calls "accretive acquisition opportunities," reinforcing the REIT's growth trajectory.

Navigating the Broader Real Estate Rebound

Canadian Net's capital raise is occurring as the broader Canadian commercial real estate market shows signs of turning a corner. After a challenging period marked by rising interest rates, analysts are cautiously optimistic about 2025. The Bank of Canada's rate cuts in 2024, with more modest reductions anticipated, are expected to ease borrowing costs and stimulate transaction activity.

Investor appetite is shifting, and Canadian Net's strategy appears well-aligned with current trends. While industrial and multi-family assets remain popular, grocery-anchored and essential-based retail properties are gaining significant traction. These assets are prized for their resilience and inflation-hedging characteristics, making them highly sought after in the current environment.

After underperforming the broader market for three consecutive years, the Canadian REIT sector is widely expected to rebound in 2025, with some analysts forecasting total returns in the 20-25% range. However, challenges remain. High construction costs persist, and the sector-wide issue of refinancing cheap legacy debt at today's higher rates will continue to pressure bottom lines. Canadian Net's ability to successfully deploy this new capital into high-quality, income-generating assets will be crucial in demonstrating its ability to create value in this evolving landscape. This financing is a vote of confidence in its strategy, but execution will be key to rewarding investors and solidifying its position in the market.