Nexus Industrial REIT

TSX:NXR.UN

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Nexus REIT 2020 Second Quarter Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.

[Kelly Clark Hanczyk, CEO, President & Trustee]

I'd like to welcome everyone to our second quarter results conference call for Nexus REIT. 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. So the second quarter was another solid quarter for the REIT. I'm not really going to spend much time going over the second quarter result. I'll let Rob go into more detail on our financials and our collections. As mentioned in our press release, we have decided to move forward with our move to the TSX. We are hopeful this will be done by mid-September. At this time, we will look to complete a share consolidation on a 1 for 4 basis. We believe this move will bring exposure to a much larger investor base and should result in positive momentum for our unit price going forward. Operationally, we continue to monitor and work closely with our tenants. Our occupancy for the quarter remains stable at 94.9%. And in April, we lost a 16,000 square foot tenant at 935 Reverchon, one of our Montréal industrial properties, but have seen interest in the space, so we hope it will be leased over the next quarter. This was more than offset by approximately 8,000 square foot at our interest of new revenue coming from our office building at 2045 rue Stanley in Montréal. We'll see a small uptick in vacancy in the fourth quarter as we have a 25,000 square foot industrial unit at 41 Royal Vista Drive in Calgary coming back to us at the end of October. We have a good handle on renewals for the balance of the year as the larger renewals are all complete or very close to being complete with only a few small retailers left, and we have had a strong start to our 2021 renewals. In Richmond, BC, we are continuing the process of repurposing 1771 Savage Road with drawing packages submitted to the city of Richmond on May 15 to accommodate our 2 new leases that have been signed. With delays in permitting due to the city employees working from home, we expect a delay in completion but are hopeful the leases will still commence in 2020. In addition, we continue to work on the drawing package for a planned 70,000 square foot addition to the property, so that we'll be in a position to pre-lease and break ground, hopefully in 2021. On the acquisition front, we have 2 potential industrial asset acquisitions under due diligence, a 95,000 square footer, strong covenant non-oil and gas-related property in Alberta on 10 acres. And one in the GTA, which would be a half interest on approximately 500,000 square feet with a strong, very strong multinational covenant. The acquisitions are expected to be funded with a combination of cash on hand, proceeds of mortgage financing and $2.75 million class B LP units of a subsidiary, limited partnership of the REIT. The units will be issued at a contractual price of $2 per unit and exchangeable for REIT units on a one-for-one basis. On the disposition side, we are marketing 2 Quebec properties. The small office properties that we have in marketing in machine, 10330 Côte-de-Liesse and are quietly marketing our large 380,000 square foot non-enclosed, strong covenant retail center in Victoriaville, Quebec. If successful, we would use these proceeds to continue to increase our exposure to the industrial real estate sector, which is -- currently fits at about 50%. I'll now hand it over to Rob Chiasson to give greater detail of the REIT financials.

[Robert Paul Chiasson, CFO & Secretary]

Thanks, Kelly. We've been pleased with the resilience of the majority of our tenants through COVID-19. Our rent collections remain strong. Looking at our rent collections, excluding amounts that have been deferred and that will be satisfied through the Canada Emergency Commercial Rent Assistance or CECRA program, we collected 97.1% of April and May, 97.9% of June and 98.1% of August. We're still determining to what extent we may participate in CECRA for August, and almost all deferral arrangements have ended. We have also seen rents being paid slower since the start of COVID-19 and expect additional payments to come through the balance of the month of August. We placed mortgages on previously unencumbered properties in the quarter, generating just over $14 million and had cash on hand at the end of the quarter of just under $19 million. We also had access to an additional $5 million under our credit facility. We're in the process of refinancing an $18 million retail mortgage that comes due on October 1, and we have 2 smaller industrial mortgages coming up in September and December. Our balance sheet is strong enough to begin looking at acquisition opportunities again. The office building that we co-own in Montreal is at approximately 97% economic occupancy with long-term tenants -- long-term stable tenants and is making a positive contribution to our results. Our NOI for the quarter was up slightly as compared to Q1, with COVID-19 reducing NOI by approximately $175,000, offset by lower operating costs, including seasonal expenses. General and administrative expenses were down primarily due to the timing of expenses related to our RSU program and other period costs but also due to decreased travel and related expenses. Our payout ratio was up slightly from Q1 to 79.8% with an all-unit acquisition having been completed in February and impacting slightly. Proceeds from mortgages put on the acquisition properties will likely be deployed to complete acquisitions to balance out the capital structure of that deal. We had other income in the quarter relating to an increase in the amount of vendor rent obligations we expect to receive from the Richmond BC property vendors through to the completion of build-out of tenant spaces. We've normalized AFFO and FFO as well as our payout ratios to exclude this income. Also on April 1 and through the second quarter, we issued units to the Richmond BC vendor for the development management agreement we've entered into and as described in the notes to the financial statements. A portion of these units is held in trust by the REIT to be released to the vendor over time. While these units are held by the REIT, they do not accrue distributions. While units are -- this is what led to a reduction in our distribution per unit for Q2 to $0.039 per unit. I'll now turn it back to Kelly.

[Kelly Clark Hanczyk, CEO, President & Trustee]

We'll now open up the call to any questions that anyone has.

[Operator]

[Operator Instructions] The first question comes from Kyle Stanley from Desjardins.

[Kyle Stanley, Associate]

Congrats on the quarter. So just looking at the COVID impact during the quarter of $175,000, the CECRA abatement was $150,000. So I'm just wondering, can you reconcile the difference there? And then maybe what are your thoughts on how that trends into the second half?

[Robert Paul Chiasson, CFO & Secretary]

Yes. So without wanting to get into specifics, we did benefit from a wage subsidy through one of our partners, property managers for us, and so their savings were passed along to us. We also incurred some incremental operating expenses in terms of health and safety at some of our properties. And so the net of some convections offered, the net of the 25% abatement for provinces outside of Québec under the CECRA program and the 12.5% abatement within the province of Québec, where the Québec government has announced a program that would reduce the landlord exposure to half what it is in the rest of Canada, that's how we come out for the $175,000.

[Kyle Stanley, Associate]

Okay. And then the $150,000 related to CECRA, so that adjusts for the 25% landlord abatement outside of Québec as well as the 12.5% in Québec?

[Robert Paul Chiasson, CFO & Secretary]

Correct.

[Kyle Stanley, Associate]

Okay. Perfect. And then so about 100 -- or 1.2 million of rents were deferred during the quarter. Were there any abatements outside of that and then not related to the CECRA program?

[Robert Paul Chiasson, CFO & Secretary]

Yes, there was a small amount of abatement, just over $100,000, and those would be tenants that primarily are retail, would not qualify for CECRA but had demonstrated financial distress during COVID, also large enough to negotiate such concessions.

[Kyle Stanley, Associate]

Yes. No, that makes sense. Okay. Just looking at Richmond quickly here. So there was $110,000 of incremental NOI this quarter from the tenant -- the new tenants paying rent. I'm just wondering, in discussions with those tenants, how are operations going at the facility so far? And then how do you expect to see kind of that NOI contribution ramp up a bit?

[Kelly Clark Hanczyk, CEO, President & Trustee]

Yes. Well, they were closed, obviously, with COVID, because the 3 that are open were closed, but they're all open and operating now, albeit by the new rules, which is probably a little tougher. So we're deciding what to do in August for them. But going forward, they would be fully operational and expect to be paying full rent.

[Kyle Stanley, Associate]

Okay. Great. And then I think there's one space left to be leased up there. So is there any development on that front?

[Kelly Clark Hanczyk, CEO, President & Trustee]

No, the spaces are leased. We're just waiting for the permitting to be able to build them.

[Kyle Stanley, Associate]

Oh, fair enough. Okay. Perfect. And then...

[Kelly Clark Hanczyk, CEO, President & Trustee]

The vendor guarantee for -- until those come on.

[Kyle Stanley, Associate]

Right. Okay. Just two quick ones for me here. The mortgage on the Victoriaville property that I thought it was maturing in July, but it sounded like maybe it's now in October. I'm just wondering what are the thoughts there.

[Robert Paul Chiasson, CFO & Secretary]

Yes. So we extended that one 3 months. Obviously, July was not a great time to be refinancing as we were in discussions through April, May on that mortgage. Most of our tenants across our portfolio or many of our tenants, I should say, across our portfolio on retail were not operating. At that particular property, I'd say about 50% to 60% of our tenants are national credit tenants, Canadian Tire, Dollarama, Metro, we've got a brick there, Mark's Work Warehouse and then some other regional retailers. So just the underwriting environment wasn't conducive to refinancing that mortgage in July. So we got a 3-month extension for lender, and we're in discussions with various lenders on that now.

[Kyle Stanley, Associate]

Okay. Great. And then just the last one. Do you have any idea on timing of the potential graduation to the TSX? I know, obviously, it depends on their approvals, but just what are your thoughts there?

[Robert Paul Chiasson, CFO & Secretary]

Yes. We're looking at September. Again, it is dependent on their approvals and us getting them all the information they need on a timely basis, but we're pushing to graduate as quickly as we can.

[Operator]

[Operator Instructions] The next question comes from Terry Fisher from CIBC.

[Terry Fisher]

Okay. Congratulations, guys. Looks like another good quarter. And not only that, I'm just reading through the MD&A, good progress on all the other things you've been working on in spite of the virus. Doesn't seem to be slowing you down that much. My question really relates to the little pie chart that is in the MD&A. If I'm reading it correctly, and I'm assuming this is as of the end of the quarter, you're at 48.5% industrial. Is that the way I'm reading this?

[Robert Paul Chiasson, CFO & Secretary]

That sounds about right, yes.

[Terry Fisher]

Where would you see it if everything goes according to plan, exiting the year?

[Kelly Clark Hanczyk, CEO, President & Trustee]

If everything went to plan, I mean with the acquisitions that we have going right now, it takes it to about 52%. My goal -- I mean if we were successful in selling our enclosed or non-enclosed retail center in Victoria, that's a fairly large center, that would make a fairly significant swing. Probably, I would think closer to approaching 60%, where, ultimately, I think down the line, I'd like to see that number approach 75%. Most of the opportunities that we're looking at and we're exploring are in the industrial sector.

[Terry Fisher]

Okay. And if you are successful in everything that you would like to divest, say, by the end of the year, would you -- do you think there are enough opportunities in the horizon in the industrial space to be able to redeploy all those funds more or less right away? Or would it take some time?

[Kelly Clark Hanczyk, CEO, President & Trustee]

I think it would take a little bit of time, but we are working on a number of other opportunities. So we have strong connections with some, I guess, you would call it, families that have possible opportunities for us. So if we have -- we're in a cash position, I think we could deploy it relatively quickly.

[Terry Fisher]

Right. Yes, I'm familiar with that because we've talked about it before, and I think that's a great plus for the REIT. Final question, and we talked about this in the last call. You're still committed to the DRIP and to the 4% discount?

[Kelly Clark Hanczyk, CEO, President & Trustee]

We are right now. Yes. We don't have a huge uptake in the participation. So I mean it's -- I think if participation went too high, we'd probably have to look at reducing it. But the way I look at it, it's rewarding the unitholders that have been there for a long time for us, and that's the way we look at it. So from our perspective, it's staying where it is for now.

[Terry Fisher]

Well, as a former investment banker, my sort of advice would be that -- and this is not hard and fast, run it by your own advisers, obviously. But coming into the TSX listing, first of all, you're going to get some additional spotlight on you just when that happens, but this to me would be a -- it would -- it adds a bit of luster to the story. And if you want to discontinue, you might wait until after that event takes place, assuming it does take place. So that's my view of it. I don't know whether you guys agree with that or not but...

[Kelly Clark Hanczyk, CEO, President & Trustee]

But we're not looking at discontinuing it at this point.

[Terry Fisher]

Right. Okay. Well, I think it's good. We talked last time, too, about if you had any ideas about repurposing any of the properties or in order to attract a different kind of tenant to the -- some of the space that might be problematic. I mean we've had government money bridge people until we're theoretically post-virus or post the subsidies. But once we get to that, the businesses have to live or die based on what consumer behavior is or whatever other business they're doing. And I don't know whether we're fully into that transition yet or not, but I know it's becoming a shrinking part of the total exposure that you have. But is there any update on any of that now that we're further along in the virus process?

[Kelly Clark Hanczyk, CEO, President & Trustee]

Yes. I'd say in the retail side, it's kind of been with our partner all hands on deck and really monitoring the tenants and working with them. So our concepts on some of our sites in Montreal, where we're talking about multifamily perhaps down the line, it's still moving but just slower than what we would have because, obviously, we've been focused elsewhere.

[Terry Fisher]

Right. Okay. Well, I think you guys are -- you could claim that the quarter was successful given what you had to deal with. And so congratulations, and that's all for me.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Robert Chiasson. Please go ahead.

[Robert Paul Chiasson, CFO & Secretary]

I'd just like to quickly clarify my comments on -- in terms of rent inflections. So we collected 97.1% for the month of April, 97.9% for the month of June and 98.1% for the month of July. I misspoke earlier and said August. For the month of August, we're still determining to what extent we might participate in CECRA, and deferrals are still -- deferrals are falling off the table. For April to date, we're sitting at about 90% collection. So that doesn't apply any assumptions with respect to ongoing CECRA participation -- month of August, sorry, 90% for the month of August, applying no assumptions in terms of CECRA. And also, we've seen rents rolling a little bit slower as we entered COVID with the payables groups of our tenants working from home and for various other reasons. So we expect that 90% for the month of August to be similar to what we've seen for April, May and June. But for now, in terms of unadjusted collections, we're sitting at about 90% for the month of August. I'd like to turn the call back over to Kelly.

[Kelly Clark Hanczyk, CEO, President & Trustee]

All right. Well, I want to thank everyone for taking the time to call in. I look forward to the next results call when, hopefully, we've graduated to the TSX.

[Operator]

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