Nexus Industrial REIT

TSX:NXR.UN

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT First Quarter Conference Call. [Operator Instructions]I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer, for opening remarks. Please go ahead.

[Kelly Clark Hanczyk, CEO, President & Trustee]

I'd like to welcome everyone to the 2021 first quarter results conference call for Nexus REIT. Joining me today is Robert Chiasson, CFO 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.Like to say that REIT is off to a fast start in 2021 I think is a little bit of an understatement. To date, we have closed on $117.5 million of world tenant industrial deals, adding approximately 1.3 million square feet to the portfolio. Six of these properties are located in London, Ontario where we expect to see significant upside as leases roll over and renew at higher rents. And we have the potential to expand the buildings here in London. So I think this was an excellent purchase for us.We have waived conditions on an additional 3 single-tenant industrial properties with 400,000 square feet of GLA to be acquired for $44.75 million. 2 of these 3 assets are new builds. We're under conditional purchase sale agreements and due diligence on another 600,000 square feet of industrial properties to be acquired for $100 million. We expect to close on those in June, July. In addition, we are in various stages of discussions on another approximately $125 million of industrial deals. I think with these deals, we are well on our way to increasing our industrial weighting and our NOI generated from our industrial properties should easily exceed the 75% of our total NOI by the end of the year.Our fundamentals continue to be strong with debt to GBV decreasing to 45.8%. And once cash from our recent equity raise is deployed, we expect our payout ratio to be back in the low 80s or better. Our occupancy for the quarter was up slightly from last quarter. In the industrial portfolio, our main vacancy -- our main vacancy is a 25,000 square feet industrial space at 41 Royal Vista Drive in Calgary. We're hopeful we will get this leased over the summer as we've seen some recent activity at the site.In our last call, I mentioned we will have 126,000 square foot office space at Place 400 in St. John in New Brunswick come back to us on April 30. So we've been marketing this space and we are seeing interest and we're in discussions with 3 separate groups for portions of this space. So over the summer, we hope we can mitigate the impact of this vacancy.Over the next 12 months, we have approximately 291,000 square feet of expiries, including the 26,000 mentioned above, where approximately 77,000 has been renewed or in discussion of renewal and we're moving along well on the retention front here.In Richmond B.C., we're progressing nicely with our renovations to fit out the space for new tenants. As mentioned previously, upon completion, which is expected to be in and around September, October, our NOI will increase approximately $165,000 per month. We also expect a significant bump to our net asset value on completion. Additionally, cap rates enrichment continue to trend lower, so this bodes well. We also have the ability to add additional square footage to this project in the future, which we will be looking at shortly.In Montreal, we continue to work with the developer on the sale of some excess land at [ Le olde Saint-Jude ] that would be proved lucrative to the REIT over the next couple of years. The developer is moving along with their approvals from the city and after a redrafted the plan to meet the city concerns, it looks positive for a late fourth quarter or early first quarter of next year approval.On the disposition front, we recently received offers for small retail property in [indiscernible] Ontario that we are working with the group for the sale of this asset. We'll continue to look at other noncore office and retail assets over the next several months and looking at divesting of some there as well.I will now hand it over to Rob Chiasson to give greater detail of the REIT's financials.

[Robert Paul Chiasson, CFO & Secretary]

Thanks, Kelly. I'd first like to just clarify, at March 31, we had 291,000 square feet of expiries over the next 12 months, of which approximately 77% has already been renewed or is in discussions. I think we may have said 77,000 square feet previously, but 77%. So we're well advanced in discussions and renewals on those properties.We successfully completed our $35 million equity offering on March 4, issuing 4,255,000 units, including the full exercise of the overallotment. This put us in a position to be able to execute on the acquisition of a number of industrial properties. And as Kelly mentioned, we've been successful in putting properties under contract.In the quarter, our weighted average number of units outstanding increased by 1,323,788 units on account of the offering and we paid $227,000 of distributions on the units issued in the March 4 offering. This had the impact of increasing our AFFO payout ratio from 84.2%, which it would have been if not for the offering, to 87.7% and impacted our per unit measures by approximately $0.07.As we put our equity to work and close on the recently announced and other acquisitions we're working on, we will see our payout ratio and per unit measures improve. On April 1, we closed on a $103.5 million acquisition of 6 industrial properties in London, Ontario. We issued approximately 65% of the purchase price in units and have the ability to increase our debt on these properties to acquire additional industrial assets. We expect that we will not see the full benefits of rebalancing our capital structure following the London deal and deploying proceeds from the equity raise until the third and fourth quarters of this year.Same-store NOI was relatively flat year-over-year with rental rate increases more than offsetting the impact of the 25,000 square foot vacancy in Calgary that Kelly mentioned. G&A expense was higher in the quarter with approximately $207,000 of onetime TSX listing fees related to our graduation from the TSXV to the TSX. And RSU expenses were approximately $210,000 higher in Q1 as compared to Q4 just due to the timing and the vesting of the RSU grades.We continue to have strong liquidity and had $50 million of cash in our balance sheet at the end of the quarter, ready to deploy for acquisitions. Cash collections continued to be strong with -- sorry, 97.9% of Q1 rents having been collected to date.I'll now turn it back to Kelly.

[Kelly Clark Hanczyk, CEO, President & Trustee]

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

[Operator]

[Operator Instructions] The first question comes from Fred Blondeau with IA Capital Markets.

[Frederic Blondeau, Research Analyst]

It looks like there is a fair amount of new supply of industrial space coming across the country. I was wondering what your views are on the new supply? And what do you see on the ground in your current and target markets?

[Kelly Clark Hanczyk, CEO, President & Trustee]

The things that we have right now, there isn't a lot of guys coming up for renewal. So we're in good shape on the industrial side for sure. And then a lot of the recent deals we've done are longer term leases. The 2 new builds are 10 and 15 years. So it really didn't even affect us. But the demand for industrial right now is huge.So I think when we're talking about new supply, you're looking at a lot in GTA and things like that. If you look down in London where we've just purchased, there is very little new supply right now coming on. So that bodes very well for our renewals going forward, especially in that market. So it is one -- it's very, very tight and I think it's one that we're going to excel in.So overall, I think our portfolio really isn't affected too much on -- with that. You're talking about big box new warehousing being built and it's partly -- the majority of it is in GTA. You've got stuff in Calgary, all back and areas like that are going to continue to expand. But I just see it as a positive. The take-up on it is large. There is big demand for industrial space right now.

[Frederic Blondeau, Research Analyst]

And is it fair to say that you have a positive views on pretty much all your current markets or there might be some of them that you have more in the radar in terms of supply?

[Kelly Clark Hanczyk, CEO, President & Trustee]

Well, London is a big one now, right. And so there's no concerns there. We're in Cambridge and the tenant has been there forever. They're not going to leave, very same thing. I look at Calgary in that area and we have some, I guess, longer term tenants built in there. So it doesn't really affect us. Our Montreal portfolio, as we see things roll, we've seen positive on the rental rates there in Montreal. Montreal has had huge demand as well. So I think our portfolio is just situated a little differently, I would say, overall. So I just see positive right now.

[Frederic Blondeau, Research Analyst]

Okay. That's great and that's fair. And it looks like you'll be on that 75% exposure to industrial fairly shortly. If we exclude Richmond, I mean, how should we view the rest of the portfolio? What should we be expecting in the short term?

[Kelly Clark Hanczyk, CEO, President & Trustee]

From -- what do you mean by that?

[Frederic Blondeau, Research Analyst]

Like what's your kind of goal on it? Would you like to be more in the 90% to 100% exposed to industrial or --?

[Kelly Clark Hanczyk, CEO, President & Trustee]

We're continuing to -- everything we look at, everything we have under contract, everything that we're looking at is in the industrial sector. So we'll start to look at divesting some of our other assets, especially need perhaps some of the wholly owned assets that we have in Montreal office in retail. So that alone will move that weighting significantly up as well. Soon as we continue to add industrial products, you'll see that weight and continue to grow ultimately. I don't want to peg us, but if things are going in the first half of the year -- second half of the year, like they're going in the first half of the year on the pipeline, it's very active. So that number can move significantly, especially if we move a couple of assets on the retail side or on the office.

[Frederic Blondeau, Research Analyst]

Right. That makes real sense. And so I guess in that sense, I mean, that is it fair to say that the rest of the portfolio should be somewhat considered noncore or is it still a bit too early to call that noncore at this stage?

[Kelly Clark Hanczyk, CEO, President & Trustee]

I'd say it's still a bit too early, but we are moving towards an ultimate goal of the industrial weighting being the majority of our portfolio. So whether that is 90% or 95% down the line, it's going to take us a little bit to get there. But that is our ultimate goal in fact.

[Frederic Blondeau, Research Analyst]

Yes, got it. No, that makes total sense. Last one from me. Would you contemplate any development projects on the industrial side or again, it would be a little bit too early to?

[Kelly Clark Hanczyk, CEO, President & Trustee]

Yes, no. To be honest, in our Richmond facility, we can add on immediately a 70,000 square foot building and we're looking at that and I'm working with the developer there, the vendor of what we're going to build and we could do some stock to industrial. We can do that at the site. So that's a possibility for us there. There's a couple of other sites that there's a potential to do kind of a development play with them on those. Our London guys, I think, we could add up to about 0.5 million square feet. So we are trying to do that right now. So on the greenfield side, we're not really, but expanding our buildings and looking at it more from that front. I think definitely. It's just on the greenfield side. It's just putting that capital to work right now. I think at this stage of our growth, that will come along in the next couple of years for us.

[Operator]

[Operator Instructions] 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, President & Trustee]

Yes. I want to thank everyone for taking the time to be on the call. And hopefully, over the next several weeks, we'll just continue to announce some additional deals and continue to build the industrial portfolio going forward. So I look forward to talking to everybody next quarter.

[Operator]

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