Nexus Industrial REIT

TSX:NXR.UN

Earnings Call Transcript 2018-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Q1 2018 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead, sir.

[Kelly Clark Hanczyk, CEO & Director]

Thank you. Welcome, everyone. Joining me today is Robert Chiasson, Chief Financial Officer of the REIT. Before we begin, I'd like to caution with regard to forward-looking statements and non-GAAP measures.Certain statements made during this conference call may constitute forward-looking statements, which reflect the REIT's current expectations and projections about future results.Also during this call, we will be discussing non-GAAP measures. Please refer to our MD&A and the REIT's other securities filings, which can be found at sedar.com for cautions regarding forward-looking information and for information about non-GAAP measures. 2018 is turning out to be another really strong growth year for the REIT. Today, we have closed and waved conditions on approximately $76 million of acquisitions, which represent $27.9 million in new equity being issued to vendors of these properties at a premium to our current trading price. One of our recently announced transactions is located at Savage Road in Richmond, BC, which closed subsequent to the quarter-end and is expected to provide the REIT with a significant value-creation opportunity in the near future. Phase 2 of expanding on the multitude sports mall concept is currently being planned out. On the operations front, we have hired a new Vice President of Eastern Canada, Joe Armenio. Joe has significant experience in the Québec market and brings many years of REIT experience along with him. From a leasing perspective, the overall portfolio, excluding 2045 Rue Stanley, ended the quarter at approximately 94.5% occupancy. 2045 Rue Stanley ended the quarter at 53% occupancy. Committed space in this property currently sits at approximately 68% with an additional -- with 4,244 square feet commencing to pay rent in June 1, 7,613 square feet commencing to pay rent on November 1 and 6,130 square feet commencing December 1. We're getting close on the 3 additional deals representing approximately 11,000 square feet. This would take us up to close to about 78%, if we're lucky on getting these. The Sandalwood portfolio remains consistent with our underwriting at approximately 90.4% occupancy. The former Edgefront portfolio continues to perform well and continues with a 100% occupancy since its inception. In the former Nobel portfolio, occupancy sits at 94.5% at the quarter-end. Vacancy is mainly concentrated in 5 assets: 10330 Côte-de-Liesse remains a challenge for us, and a new mandate with a national broker is being prepared for the property. On the acquisition front, we are in advanced negotiations on 2 additional properties representing approximately $25 million of new real estate and approximately $12.5 million of units in the REIT being issued to the vendors at a premium to our current trading price. If we're successful in completion of these acquisitions, it would bring our total new equity issued to vendors for the year to approximately $40 million. I'll now hand it over to Rob Chiasson to review the financials.

[Robert Paul Chiasson, CFO & Secretary]

Thanks, Kelly. We came into Q1 2018 off strong Q4 2017 results. In the fourth quarter, we had a total of approximately $400,000 of management fees included in income. Included in that figure were construction management fees that were approximately $160,000 higher than those earned at Q1 2018. Percentage rents in the first quarter were approximately $100,000 lower than the fourth quarter of 2017. Most tenant sales thresholds were met per percentage rents towards the end of the calendar year. While the majority of the REIT's approximately 500 leases are triple net, we do have some government and other leases that are gross, and utilities and snow removal costs for the quarter were up seasonally by approximately $500,000 as compared to Q4. Our general and admin expense for the first quarter was down $236,000 as compared to Q4. And as mentioned in our last call, a full year's bonuses were accrued and expensed in Q4 2017 as compared to 1 quarter was expensed in Q1 2018. In the quarter, the REIT adopted the Realpac definitions of FFO and AFFO, which were published in February of 2018, which provides -- provided guidance with respect to adjustments for stock compensation. As a result, the REIT's FFO and AFFO were adjusted downward by approximately $50,000 in the quarter. Q1 2018 AFFO per unit was $0.046 per unit, down from $0.048 per unit for Q4 2017, and the AFFO payout ratio for the quarter was up slightly to 86.2% compared to 83.6% for Q4. REIT's total assets was down to 53.7% compared to 55.2% for Q4 2017. I'll now pass it back to Kelly.

[Kelly Clark Hanczyk, CEO & Director]

Thanks, Rob. I'll now open up the line to answer any questions that you may have.

[Operator]

[Operator Instructions] The first question comes from Brad Sturges of Industrial Alliance Securities.

[Bradley Sturges, Equity Research Analyst]

Just starting off with your commentary on, I guess, a few of the more challenging assets in the Nobel portfolio. You've hired an external broker. Would you be potentially considering selling those assets? Or is it mainly a focus right now on trying to improve the leasing or the occupancy levels of those assets?

[Kelly Clark Hanczyk, CEO & Director]

Yes, I think right now, we're looking at leasing them up as quickly as possible with a couple of them in particular, Mascouche and Côte-de-Liesse, are a little bit of a challenge. Two more, Reverchon, it has 10,000 square feet vacant that came from a restructuring of leases and moving people around to accommodate an expansion. But it's a very in-demand industrial building, so I don't imagine that unit is going to stay long there. So the Mascouche and Côte-de-Liesse, I think our focus will be on selling them off, and then we'll have a good, hard look at them as whether they stay in the portfolio going forward or what we do with them. But I would think down the line, once we've stabilized them a little more, we would possibly look to divest.

[Bradley Sturges, Equity Research Analyst]

Okay. And when you look at the other -- the rest of the portfolio, you've had a couple of small asset sales out West. Just curious to get your thoughts. Besides those assets you're looking to lease up first, are there other potential asset sales at this time? Or are you -- is it more just focus on the acquisition growth part of the equation, I guess?

[Kelly Clark Hanczyk, CEO & Director]

Yes, I think a little bit of both. We talked at a board level yesterday coming up with an asset recycling plan. So I think by the next quarter, we'll kind of targeted maybe 3 or 4 additional assets that we would look at potentially divesting up later in the year.

[Bradley Sturges, Equity Research Analyst]

And do you have a ballpark at this stage of what the proceeds would be from those 3 or 4 assets?

[Robert Paul Chiasson, CFO & Secretary]

Well, I don't -- I think it's until we can point them. But I don't think we'd be talking to -- it wouldn't be in the [indiscernible].

[Bradley Sturges, Equity Research Analyst]

It's a modest amount is what you're saying?

[Kelly Clark Hanczyk, CEO & Director]

Yes, it would be smaller. Smaller.

[Bradley Sturges, Equity Research Analyst]

Okay. And with the sports complex in Richmond, B.C., obviously, you're working on plans for Phase 2. What's -- at this stage, what's the potential time line where we could start to see work at the property?

[Kelly Clark Hanczyk, CEO & Director]

It's a little too early to tell. I just got a plan for Phase 2 the other day, so I have to review it in the meeting with the group next week. But it looks exciting, the ability to add on to the property is almost conjoin them, as you would say, and then that would kind of be the Phase 2 additional square footage. And then the Phase 3 would be to deal with the larger property. We have an existing tenant there. But I think down the line, whether it's 1 year or 1.5 years in Phase 3, we'd look at possibly taking back that space and continuing on with the program. So I think -- but that also has to be worked out. But definitely, the Phase 2 is something we're looking at. And as soon as I'm comfortable with the plan and everything that we've created there, we'll take it to the board for approval. But it's exciting because I think the rendering and the plans that I've seen are starting to look very exciting, and I think the value creation opportunity there is going to be very large.

[Operator]

[Operator Instructions] The next question comes from Stephane Boire of Echelon Wealth Partners.

[Stephan Boire, Analyst]

I was just wondering, will it be possible for you to give us the cap rate on the Nisku and Regina acquisitions?

[Kelly Clark Hanczyk, CEO & Director]

Yes, I believe the Regina was about a 7.5%, and I think Nisku was a 7.2%.

[Stephan Boire, Analyst]

Okay, good. And also, more generally speaking, what do you see in terms of the cap rate environment right now?

[Kelly Clark Hanczyk, CEO & Director]

Oh, it is all over the place. It depends on where you're looking, what you're looking at. I mean, if you're looking at Class A office downtown or Montréal getting costly, the thing is we have been looking at and been completing, and I would call them off-market, so it's a little different, but I'd say in Montréal, anywhere in the office, you're in the 6% cap. Forget Vancouver area, that's -- it's insane cap rates. But Alberta, depending on the property, you've got anywhere in the 6.5%, 6% cap, all the way up to 9% cap. So it depends on the location and where you're looking.

[Stephan Boire, Analyst]

Okay, great. And in terms of your current acquisition pipeline, do you see a further opportunities within the Sandalwood portfolio, notably in regards to the 24 co-owned properties?

[Kelly Clark Hanczyk, CEO & Director]

So I'll answer that with a very big -- it's possible. I don't know timing yet, but we have discussed it briefly, the concept, the idea. But we're quite a ways off on still having to try to figure out what something would look like. So I don't know if that's in 1 year or 2 years, 3 years, but we have a very strong relationship with the owner. And for me, they've been a great operator for us, and it's definitely something that we're interested in.

[Stephan Boire, Analyst]

Okay, great. Perfect. And finally, just regarding the Richmond property, Kelly, I know you mentioned that it's still very soon to give some color on the time line, but can you give us an expected civilized cap rate on this property at this point? Or is it still too soon again?

[Robert Paul Chiasson, CFO & Secretary]

The -- it's -- I mean, we purchased that at 7.6% -- sorry, 6.5% cap rate. So that's a going-in cap rate based on the existing tenancies. And then in terms of the returns of the Phase 2, we have done some modeling. But until we've finalize Phase 2, we will be adding GLA and, essentially in Phase 3, as Kelly mentioned, converting the industrial tenant to the sports hall concept, which would mean increased rents per square foot. So there's still a few moving -- still a few moving targets. So to quantify, the total returns of Phase 2 and Phase 3 is probably a bit premature, but we did buy at the 6.5% cap based on in-place.

[Operator]

The next question comes from Himanshu Gupta from GMP Securities.

[Himanshu Gupta, VP & Equity Research Analyst]

Just to follow up on the Richmond property. And I know you mentioned 6.5% going-in cap rate and too early to tell the returns. How much CapEx is expected to be spent in the redevelopment over the time?

[Kelly Clark Hanczyk, CEO & Director]

I would say about $15 million to $20 million.

[Himanshu Gupta, VP & Equity Research Analyst]

$15 million to $20 million. And this includes in terms of adding the GLA on the existing property?

[Kelly Clark Hanczyk, CEO & Director]

Yes, this would -- I call it 3 phases. Call -- there's the original Phase 1. That was the original building. Phase 2 would be a structure to combine the 2 together, and Phase 3 would be the redevelopment of the existing industrial building with work still in it. So that would be somewhere in the $15 million to $20 million for the entire project. So Phase 2, Phase 3.

[Himanshu Gupta, VP & Equity Research Analyst]

Got it. Yes. In terms of time lines, it's probably 12 to 18 months. Is that reasonable or...

[Kelly Clark Hanczyk, CEO & Director]

Yes, I mean, from a pure operations standpoint, we have to look at it, and I've got to -- we'd have to approve the plan, then we have to go for permits and that type of thing. So I would imagine once we're in play, that we'd be looking at maybe a late fall, winter or first quarter of next year, I would think, kind of where we'd be ready to go.

[Himanshu Gupta, VP & Equity Research Analyst]

Okay, got it. And just switching gears on the quarter 1 performance. So my question is regarding the sequential drop in NOI. I understand the asset and construction management fee of around $200,000 was in quarter 1 NOI numbers. It was not in Q4. So the drop is actually $450,000 somewhat. So can you break it down? How much were seasonal factors? How much was that lower percentage rents? And how should we model it going forward?

[Robert Paul Chiasson, CFO & Secretary]

Yes. So I'd call it approximately $100,000 percentage rents, and there was a $170,000 adjustment or true-up on straight-line rents. And that's -- that doesn't fall to AFFO because it gets added back. But there is a straight-line rent adjustment that's accounted for $170,000 -- $100,000 of percentage rents. There was some seasonality. There were some other smaller items that added up. For example, there was some bad debt expense in Q4 that was recovery in Q1. But those are the big items within there.

[Himanshu Gupta, VP & Equity Research Analyst]

Okay, that's helpful. And I guess one just final question on 2045 Rue Stanley. And I know you're working towards the lease-up. Are we still expecting $900,000 of annualized NOI once the asset is fully stabilized?

[Kelly Clark Hanczyk, CEO & Director]

Yes.

[Robert Paul Chiasson, CFO & Secretary]

Yes.

[Operator]

There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.

[Kelly Clark Hanczyk, CEO & Director]

Well, I want to thank everyone for calling in, and I look forward to our next results call in the next quarter.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.