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Nexus Industrial REIT
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Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT Q2 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.
Welcome, everyone, to the 2018 second quarter results conference call for Nexus. Joining me today is Rob 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.With the first half of the year in the books, Nexus continues to execute on all measures. Our AFFO payout ratio continues to be low at 83%. It has been a highly successful first half of the year on the acquisition front. To-date, we have closed and waived conditions on $83 million of acquisitions, which represents approximately $35 million in new equity being issued to vendors of these properties at $2.10 a unit, a premium to our current trading price.On April 30, we closed on Savage Road in Richmond, BC, that we expect to contribute a considerable lift to the REIT's NAV. We purchased the property for significantly less than appraised value and intend to reposition a portion of the property. Two industrial properties in Nisku, Alberta, closed on June 7, and an additional industrial property in Regina, Saskatchewan, closed on June 27, strengthening our industrial profile.Subsequent to quarter-end, on August 1, we concluded an all-unit deal for a $6.6 million service retail property in Beamsville, Ontario. This property appraised at $8.25 million. And once again, we issued units at $2.10 per unit, again, a premium to our trading price.From a leasing perspective, the overall portfolio ended the quarter at 94.2% occupancy. Excluding 2045 Rue Stanley, which is currently at 55%, our occupancy was 94.8%. Approximately 74% of the GLA of Rue Stanley is occupied or committed.Now that the construction holidays have ended in Quebec, we are hopeful that we'll ink a deal in the next few weeks on one of the prospects that we are currently in late stages with. Each floor we lease represents approximately $100,000 to $175,000 of income improvement. The Sandalwood portfolio remains consistent with our underwriting at 90.4% occupancy, and the former Edgefront portfolio continues to perform well and continued 100% occupancy since inception. In the former Nobel portfolio, occupancy sits at 94.5% at quarter-end, with, vacancy mainly concentrated in 5 assets. On the acquisition front, we are in advanced negotiations now on 2 additional properties representing approximately 25 -- $27 million of new real estate and approximately $8.5 million of units in the REIT being issued to the vendors, again, at a premium to our current trading price. Successful completion of these acquisitions would bring our total acquisitions for the year-to-date to approximately $110 million and new equity issued to vendors at approximately $43 million. We continue to have a strong acquisition pipeline, and we expect to continue our path of growth.I'll now pass it over to Rob to review the financials.
Thanks, Kelly. As Kelly mentioned, our portfolio performed to expectation in the quarter. We sold 2 properties in the quarter and acquired 3 properties. Q2 NOI of $8,235,670 was $305,743 higher than Q1 NOI. Acquisitions contributed approximately $240,000 of NOI in the quarter, and dispositions accounted for approximately $120,000 lower NOI as compared to Q1. Apples-to-apples, NOI for Q2 was up by $185,000 as compared to Q1 with higher construction management fees accounting for approximately $40,000 of that $185,000 increase.Property we acquired in Richmond, BC, is undergoing tenant fit-up, and the vendor is obligated to complete the buildout at the vendor's cost and has guaranteed NOI until the buildout is complete and tenants are occupying and paying rents per their leases. For IFRS accounting purposes, this vendor income guarantee is not included in the NOI, and accordingly, we have normalized FFO and AFFO to include this.Normalized AFFO per unit of $0.048 for Q2 2018 increased 2.4% as compared to Q2 2017 AFFO per unit of $0.047 and increased 3.7% as compared to Q1 2018 AFFO per unit of $0.046. Adjusted normalized AFFO payout ratio for Q2 2018 of 83.4% is down from 85.2% for Q2 2017.Q2 2017 payout ratio was adjusted for the impact of an equity raise the REIT completed on June 30, 2017, in which 33,350,000 REIT units were issued on the last day of June, and distributions were paid on these units. On April 30, 2018, 9,666,667 units were issued in connection with the Richmond acquisition, and distributions were paid on these units for the month of April. Adjusted distributions for Q2 2018 exclude these April distributions on these units.Looking at the balance sheet, our debt-to-total assets increased slightly to 53 -- 54.3% at June 30 as compared to 53.7% at March 31. We had more cash on hand at the end of this quarter than the previous quarter, and that cash was used to pay down revolving debt subsequent to quarter-end.Now I'll pass it back to Kelly.
Thanks, Rob. I'll now open up the line to any questions that anyone has.
[Operator Instructions] Our first question comes from Stephan Boire from Echelon Wealth Partners.
I was wondering if you could provide an update on the leasing activity for the more challenging assets, such as Cote de Liesse, Mascouche or Magog.
Yes, sure. Cote de Liesse and Mascouche have been very slow. We're probably looking at those as underperforming assets and possibly look to roll those out of the portfolio at some point, both in challenging markets. Cote de Liesse is an office -- it's an office building in an -- a very industrial [ neighborhood ] by the airport. So we will probably look at doing something sooner than later.
Okay. And what about Magog? I think there was one with slightly lower occupancy.
Yes, so Magog is at its historical occupancy, and it's at the level roughly that we bought it on. So we're not suffering from the lower occupancy there, but it is sort of at its average historical levels.
Okay. Also, can you give us some color on the redevelopment at 2045 Stanley and if your budget has changed?
So we're pretty much done on the base building side. We've completed some base building renovations on street floors and -- so we've come in better than -- a little bit better than budget on some of those demolition, and so we don't expect a significant change in the construction budget.
All right. Perfect. And finally, just a quick -- well, could you give us some little detail -- a little more details on -- regarding the $6.6 million acquisition in Beamsville and the other 2 additional acquisitions that, Kelly, you mentioned earlier, including the cap rate and occupancy?
So the Beamsville asset is a food court asset with A&W, KFC, Subway, Tim Hortons among the tenants there as well as a gas station. It's 100% occupied. And the cap rate on that?
I guess, I believe it was about 7.2%, somewhere around there.
Okay. And then, the acquisition in Regina was 100% occupied. And forgive me, I don't have the cap rates all off-hand, but I do have a file here where...
I believe that was close to 7.5% on that one and then the Nisku properties, just bear with me, and I believe that was in the 7%, 7.5% range.
Right. So the Nisku was a 7% cap rate, but Beamsville was roughly 7.2%, Regina was 7.9%.
Okay. So sorry about that, but those aren't additional acquisitions, right. They're -- those are ones that were mentioned earlier in previous calls?
So the ones we're looking at right now are about a 6.5% to 7%.
And that's the one at -- for $27 million, right.
Yes. That would be 2 assets that we're looking at.
And it'd be 100% occupied.
Yes.
[Operator Instructions] Our next question comes from Brad Sturges with Industrial Alliance Securities.
Just on the 2 assets you're looking at right now, where -- can you give a sense of -- give us a sense of what type of assets they are or where they're located?
Sure. One's in Calgary. It's industrial. One's in Montreal, and it's more a retail office.
Both long-term leased, I guess?
Montreal area.
And both long-term leased?
Yes, the Calgary is with the long-term leases, multitenant. And the Montreal one would be relatively long-term leases, yes.
In terms of Savage Road, can you just give an update on when you expect, I guess, Phase 1 to be stabilized from the rent perspective? And then any updates on looking at what Phase II could -- how that could start, how that could look from this, I guess, currently anyways?
Yes. For sure. So Phase 1, to put in perspective, we get full rent from it. So the vendor is obligated to give us full rent and is backed by securities. So there's 2 tenants that are in place operating. The other ones are in various stages of construction. So I expect it kind of to be done and turnover all tenants by January 1. So there's a little bit of staggered schedule, say, October to January 1. And then, for -- so that would be then fully operational, fully paying, no more of the vendor support on that Phase 1 of the property. So then Phase 2 is -- would take a while because there's a -- there'd be a bit of a process just to -- we're working on getting leases in place. And once we get leases in place, then we would look to look at the existing deal that we have and to see at what stage we could have that vacated out. So my guess for that, to be honest, is probably about a year to 14 months kind of process for that.
And does the income support work just for Phase 1? Or would that include redevelopment on Phase 2 as well?
No, that's Phase 1. And then Phase 2, that list that we will create is capital that we would spend to create that additional value.
But we have come up with a plan that would minimize vacancy, and -- so if we did an early termination with the existing tenant, we have a plan, whereby, a majority of the work could be done with the tenant still in place.
Yes, and there would be no downtime on the switchover as we're guaranteed that rent as well.
[Operator Instructions] Our next question comes from Mike Markidis with Desjardins Capital Markets.
Kind of a laundry list of things here, so please bear with me. Just on the Savage Road asset, when you're talking about the 12 to 14 months, I guess, you're talking about lining up the leases and coming up with a deal to vacate and then there'd be an additional time to actually execute on Phase 2.
I would say, we worked out sort of -- I mean, we're in various stages of it right now. So everything's got to come together. So we would be able to do work on the existing building with the existing tenants there. And then, once we came up with an agreement with that tenant, we would look to then move inside and continue on. So depending on how fast we could get that -- this done, it could be 3 months, and then there'd be obviously time for them to vacate and then, again, from there to build out the tenant. So I'm thinking 14 months kind of in my time frame window that I'm -- in my head that I'm looking at right now.
But when you say 14 months, would that actually be at -- with the new tenants in place or...?
Yes, I would think -- 3 -- I'd say, yes, 14, 15 months, I think, we could probably have guys in place and turned over.
Okay. And I think you mentioned there's an arrangement in place where you would not suffer any downtime just the way that deal is structured in terms of income?
Yes. So if that -- if we had an early termination, we're still covered on that existing rent.
Okay. And what's -- can you remind me what the capital -- roughly, the incremental capital would be required to execute on that? And would that include a potential fee to [ Wärtsilä ] for an early termination?
It would not have a fee for an early termination. And the capital, it's a little early right now, but I think to use that $3 million to $5 million number, that was just a general early number. I think somewhere around there.
Okay. And then the lift is that the rents for these sports providers would be higher and then, presumably, the cap rate could come down for that asset, perhaps.
Exactly, exactly.
Okay, okay. That's great. On Rue Stanley, I just want to make sure, 55% is actually the in-place occupancy for the quarter, and 74% is sort of the committed, and all that comes online before year-end, the incremental 24%?
No. There's 2 deals that we've done, representing -- just bear with me here, call it, 6,200 square feet, that don't commence till June 1.
June 1, 2019?
Yes.
Okay. Okay. And what is the -- it sounds like you were pretty optimistic about the remaining space. What does that pipeline look like? And what would your expectations be in terms of when that income might come onstream?
Well, I'm pretty optimistic that we're going to be able to get one floor done relatively soon. There is someone we're dealing with that is fairly down the line. So that would take us to, I believe, about 80%, 81%, if we're able to get that, and that would leave, effectively, one more full floor and then a couple other units. So -- but it has picked up. The construction holiday has ended, and we're seeing a lot more traffic and a lot more people coming through that are -- seem to be very interested. So -- and the apartment building that was being built beside us, they've poured the slab. Everything's done, and they're completing the interior. So it's opened up Stanley a lot more than what it was in the past. It was a little bit of a construction nightmare. So I think that tends to help the traffic flow.
Yes, I was just about to ask it. I mean, with the benefit of hindsight, I think the progress there has been a little slower than maybe what was thought kind of a year ago. I was just wondering, just given all the -- with the supposed strength we've here in the office market in downtown Montreal, what might be causing the difference versus the original expectations?
It really was, when we -- there was times when I would go to the building and the entire street was closed off, and you got trucks parked in front. So I think it really -- we felt the effect of that new property being built.
We've also made other changes, bringing on a national broker at the beginning of the year, and Kelly also made a change in terms of bringing on an EVP of Eastern Canada, who's helping with the lease-up. And we finished the lobby. Originally, the lobby was being done last to preserve it so that there wasn't damage done to it through construction, but in hindsight, perhaps, that should have been done first. And so there's a number of changes we're making that make the building show a lot better and give us better success.
Yes, we've completed these building demolition in the -- on the full floor, vacant floor, so it shows pretty well.
And Rob, I guess, you guys are still getting the construction management fees on that because, I think, the recurring fee stream you'd have on Sandalwood is kind of more in the $125,000 to $150,000 range. When do you expect the elevated contribution on the construction management side will start diminishing through your P&L?
Really, anytime now. I mean, we'll get some construction management fees, I think, in Q3, but we're pretty much done on base build. So there are some PIs that we'll earn fees on, but by the end of the...
But most of the heavy lifting's done?
Yes, most of the heavy lifting is done.
Okay. I have some more, but I'm going to turn it back just in case just to give somebody else a chance, and if not, I'll turn back in.
There is no one currently in the queue. Please go ahead, Mr. Markidis.
Okay, great, I don't even have to press *1. this is more of a technical question, but I just noticed in your AFFO, you're talking about the reserve you use and how your spending this year has exceeded that due to the spending that was anticipated on Sandalwood, but then there's also mention of a $2 million reserve that was undrawn. And I guess, I'm wondering if you're spending elevated amounts, why the reserve is still undrawn?
Yes, so the intention would be to draw the reserve in the third quarter. It's just a timing thing.
Okay. And does that -- does the reserve sit on your balance sheet or is that...?
It does. It sits -- I believe it's in other current asset, either other current or other noncurrent, but I believe it's other current, and it's detailed in the note.
Okay. And is that a "use it or lose it" thing? Do you have a time line associated with drawing all that down or...?
No, we don't.
Is that just your own capital that was put aside, basically?
Yes, it's a portion of the purchase price...
Purchase price, yes. Okay. On the debt maturities, the rate on your credit facility and when that comes due is all pretty clear. I was just curious more about the remaining mortgages for '18 and then the stuff that's coming due in '19. I know the average rate for the mortgage pool is 4 14, but what is the maturing rate look like on the '18 and '19 maturities?
Yes. So I'll need to get back to you with this specific number. I don't have that in front of me, but we did have a couple of mortgages that became current at the end of Q2 because they're maturing within Q2 of 2019, but I'll have to get back to you on the rates.
Got it. That would be great, if you could. And then last one from me, finally, is, Kelly, you kind of mentioned that Sandalwood was performing in line with your underwriting, but I guess, the occupancy in that portfolio has remained stable. I think when you bought it, you guys talked about opportunities to maybe drive occupancy higher. I was wondering if you could just kind of talk about if those opportunities are still there. And what the potential upside might be in the next 12 months?
Yes, I think they will. They've been performing pretty well, and when we had some head lease space there in, I believe, in old Montreal, and I know that they replaced the head leases with new tenants that were paying a higher rate than what we had that they were paying. And then when I look at a hole, we have driven some deals, and yes -- and actually replacing the head leases is all we got additional terms so as well and, but we had then a couple vacated because they couldn't expand in the buildings. So -- but very solid spaces. So I think, over the next little bit, you'll see a start to slightly uptick, I'm -- from what I'm seeing as the trend. So if some guys don't vacate and things stabilize, we can support them. I think we'll start to see some uptick on the occupancy there.
Okay. And on the leasing you've seen in that portfolio so far, would that -- are you guys getting any lifts at all? Or has the rents been flat just kind of getting a sense of what the rent...
Yes, I think, definitely in the old Montreal portfolio, you're seeing lift over what we had underwritten. So in the old historical building, it's a very good note, and I think we'll continue to see that trend. Retail -- can you jump...?
I mean, on the retail side, I think, generally, we're seeing favorable lease renewal terms.
Yes, I mean, we -- it's been pretty good, and even we're working on a new deal that was -- the space was vacant for quite some time, a couple years, and we've managed to do a deal on that space. So overall, I think it's fairly positive.
Okay. And if I remember correctly, correct me if I'm wrong, please, you have a ROFO on the 50% that Sandalwood still owns. Do you've any sense of any conversations with them into terms of what their outlook would be for keeping on? Or do you think they might have an intention to exit the rest of that portfolio in the near term?
Yes. I mean, I don't think near term, but we do have a really strong close relationship with them. So as we continue on and go, I think things will evolve. And hopefully, at some point, I could see the rest rolling in, but that's honestly is -- would be also entirely up to them, and it's the plan. So -- but we really do have a strong relationship with them. So it's definitely a possibility.
Maybe they could take units at $2.10 or $2.20 like you were doing with everybody else?
That would not be so bad.
This concludes the question-and-answer session. I would now like to turn the conference back over to Kelly Hanczyk for any closing remarks.
I'd just like to thank everyone for calling in, and we'll see you next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.