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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 Second Quarter 2021 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Kelly Hanczyk, CEO. Please go ahead.
Thank you very much. I'd like to welcome everyone to the 2021 second quarter results conference call for Nexus REIT. Joining me today, as usual, 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.In 2014, we began as a very small pure-play industrial REIT. In 2017, we pivoted to diversify to accretively grow and gain access to the Quebec market. Since 2017, we have returned to our roots, focused on acquiring industrial properties. We are executing on our strategy and at a pace much greater than I originally expected. For the second quarter, we have closed on $148.3 million of industrial acquisitions and subsequently have closed on another $76 million. And this morning, we announced we have waived conditions on another 19.7 million strong covenant industrial distribution center in Alberta with a 10-year lease term. We have an extremely full pipeline right now. The deal flow is huge. And at the moment, we are quickly increasing our industrial weighting and will continue to do so throughout the year. Our NOI generated from our industrial properties will easily exceed the previous target set of 75% by the end of the year. Our fundamentals continue to be strong. On March 4, we closed a $35 million offering. And on April 1, we closed on the London transaction. Subsequently, we entered into a new $40 million credit facility and placed on 3 of the London properties. We are well on our way to deploying this liquidity. Our occupancy for the quarter was up slightly from last quarter. In the industrial portfolio, our vacancy continues to be mainly a 25,000 square foot industrial space at 41 Royal Vista Drive in Calgary. We are encouraged by recent leasing inquiries, and we're hoping, soon, we'll see some paper on that space. We also have a 26,000 square foot office space of Class 400 in St. John, New Brunswick, that came back to us on April 30 as we previously announced. We've been actively marketing the space and have subsequently leased about 5,000 square feet of it. And we currently have about 3 possible groups interested in different portions of the remaining space, which should help mitigate the loss of the rent. In Richmond, BC, we're progressing quickly and nearing substantial completion and turnover to our 2 tenants on the repurposing of the 60,000 square feet former industrial space into a much higher-yielding skate and hockey tenancies. As mentioned previously, upon completion, which is expected to be in and around September or October, our NOI will increase by approximately $165,000 per month. We also have the ability to add an additional 74,000 square feet right now to this project in the future, and we're currently in for permitting with the city. In Montreal, we continue to work with the developer on the sale of the excess land, as mentioned before, at Les Halles d'Anjou, as the developer is moving pretty quickly now, and it looks like their approvals are coming a little quicker than we thought. So it looks positive for late fourth quarter. On the disposition front, we've targeted 6 potential high-quality retail and office properties for sale in the fall. While we're not really in a rush to move the assets, we believe they'll garner much attention in the marketplace and a lot of interest and will give us additional funds to redeploy the proceeds from the sales into additional industrial products. I will now hand it over to Rob to give some greater detail on the REIT's financials.
Thanks, Kelly. Between the $35 million offering in March and the London vendors taking back a significant portion of the purchase pricing units, we had approximately $75 million of cash to deploy, allowing us to complete approximately $200 million of cash acquisitions. In mid-June, we completed approximately $45 million of cash acquisitions. As a result of completing these acquisitions towards the end of the quarter and having cash left to deploy, our unit measures -- our per unit measures were diluted and our payout ratio was increased. As Kelly mentioned, we will see the benefit of deploying the proceeds of the raise and balancing out our capital structure in the coming quarters as we fully deployed this cash. We revalued our portfolio in the second quarter, seeing fair value increases primarily in our industrial portfolio. Montreal industrial cap rates have come down significantly over the past 2 to 3 quarters. We also saw industrial cap rate compression in Ontario and some movement in Calgary. While we are aware of activity in the Edmonton market that may suggest cap rate compression there, too, this is not yet reflected in published cap rates. Same-store NOI was down in the quarter, primarily as a result of 2 vacancies Kelly mentioned: A 25,000 square foot industrial vacancy in Calgary and a 26,000 square feet of space in an office building in St. John, New Brunswick, which came back to us at the end of April. There has been encouraging leasing activities on both of these vacancies. G&A expense was lower in Q2 as compared to Q1, with TSX graduation costs hitting in Q1 and with -- due to the timing of period costs. We entered into a new revolving credit facility in June for $40 million, which was undrawn at quarter end, and we continue to have ample liquidity. I'll now turn it back to Kelly.
All right. Well, I'm going to open it up to any questions.
[Operator Instructions] Our first question is from Liyan Chen with iA Capital Markets.
First question for Rob. If you combine cash on hand as of Q2 and post Q2 subsequent to financings, what would be your current cash position? And then what would be your buying capacity going forward?
Okay. Thank you for the question. I think right now, we're sitting with the capacity to do about $100 million worth of deals on top of the $20 million deal that we announced yesterday, where we waived conditions. So about $125 million total and $20 million will be used for that acquisition. So we've got the capacity to do about another $100 million.
Okay. That's great. And I guess last question for Kelly. I was just wondering if you could provide some color on just the overall environment and conditions for any -- like any potential future acquisitions and more specifically as to timing, cap rates and any other potential new markets?
We're active in the markets we're in. And so on the pipeline, like we've been pretty successful in completing deals above a 6 cap, so that's been going pretty well. We have a number of deals in different stages of negotiations. I don't want to give a number, but I mean, it's a healthy amount of deals that we're looking at. So I think, going forward, we'd be in the 5.5 to 6.8 range, I think, overall of the product that we look at. It's what we focus on. You're not going to see that in GTA or Vancouver or in some parts of Montreal, but we've been pretty successful in the markets we're in on finding pretty good deals. We'll just continue to source those right now. And like I said, we do have a pretty active pipeline. So you'll see a pretty active fall for us, I'm assuming.
Our next question is from Brad Sturges with Raymond James.
During the quarter, you had a $10 million asset classified for sale. Is that the excess land at Halles d'Anjou, or is that something else?
It's something else. It's a retail property that we have a firm offered it to acquire from a purchaser.
No.
Well, purchaser will acquire. And we're subject to some confidentiality under the PSA. So we're being a bit intentionally vague, but it is a retail property.
And would that be included in your 6 identified assets then for the fall?
No. No. That's above and beyond. So, yes and when I talk about the 6, it's kind of 6, I call them, relatively prime assets that we have that will garner quite a bit of attention. They're pretty solid.
And what would be the -- if you were to sell all 6 in the fall, what's the quantum of proceeds you think you could get from that at this point?
Yes, I'd say it's between in and around $100 million, $110 million, in that range.
And where would you be in the process of Halles d'Anjou on in terms of monetizing some of the excess land?
Yes, it's funny you asked that. I was in Montreal 2 days ago, and I actually sat down with the buyer, interesting gentleman, who has actually some other opportunities that might work out well for their REIT down the line. But he said it's going extremely well. He considers this a done deal, so we're hoping to have the paper signed pretty soon because it looks like it's a go from the city on his viewpoint.
Okay. So let's say that's Q4 as well?
Yes, I think so. And remember that it goes in stages as well, right? That's not one big lump sum. It's a staged payout.
Yes. Okay. Maybe switching gears just to the fair value gain. Obviously, a good chunk of that's with Richmond. What would that imply in terms of the cap rate from Richmond? And then can you just talk about the loan-to-value on the property and the potential refinance?
Yes. So on Richmond, we've got about a $30 million loan right now, so there's a good opportunity to leverage that up. We ended up valuing it at about $108.5 million, which works out, I think, somewhere around a 4 cap, give or take. And we've got appraisals -- we've got an appraisal that we've commissioned that's in process. We'll get that back shortly, and we'll reevaluate $125 million at that time.
Yes, the building is not yet done, so we took it, call it a partial write-up, and then we're finalizing with appraisals in the process, which will kind of show up, I think, in the next quarter.
Okay. And then you would revisit the loan-to-value or try to upsize that?
Yes. If we were lucky and we got a permit, the cost of construction could be funded rate out from the increase in pulling out cash on that asset, plus still give us a substantial business. Like we said, we're going to be sitting here with a fairly large substantial asset that only has $30 million of debt on it.
Okay. And would that be your plan maybe to take out cash from the assets to pay part of the profit share? Or how do you feel about -- how you would pay for the profit-sharing arrangement for what you owe to the developer?
Yes. Well, we have an agreement with them, so there is a mechanism in place on price for the units. So we're still going through that whole process. So kind of finalizing what the final lift calculation would be. So we can do it in units. We have a number of options.
So there would be an opportunity to fund that through the upsizing of the loan on that property.
Okay. And then just in terms of lease commencements, is that all in place in the rent start by the end of the quarter?
I think -- so I -- hang on. One of them, I think, will commence real soon, but there is -- I believe there's a couple -- there's 2 months free rent on it. So the rent would probably kick in, say, if it's mid-August now whether that's October, yes, in Q4. And then the other one, there's a slight delay just from -- it is really hard to get steel right now, but we -- so there was a delay because it actually has a new roof on that portion that goes in. But we've got it in now and they're blasting away on it. So I'm hoping that, that will be done September and then that kind of kicks in, in the October range is what I'm hoping for right now.
So Q4, you might get a pretty close to a full run rate on the NOI?
Yes. Yes, for sure. Pretty close.
And for Phase 3, have you already started pre-leasing discussions there? Or how do you think about when that would really ramp up?
Yes. So we have -- the project is actually garnering a lot of interest in Richmond, so it's become quite the big deal out there. So we have 3 guys that really want in, and we'll put paper the minute we start to get when we know we're -- when and at what point we're going to have that approval from the city. So when we have the permanent hand, we'll get leases signed up. And then once we have the leases signed up, which shouldn't take too long, then we'll break ground.
The next question is from Kyle Stanley with Desjardins.
So just looking at the acquisition environment, you've talked about it a little bit. I mean we've all seen a number of high-profile transactions announced lately. Are you seeing any significant changes in the competitive environment or the types of buyers that you may be competing against? I mean I know, historically, you've leveraged your network to source off-market deals. Just wondering, I guess, the runway for you to continue sourcing those off-market deals or at a certain point, do you anticipate having to enter more competitive bidding processes?
So I'll say that our runway is still pretty large on off-market deals. So you'll see a significant amount that will come in off market. So that is ongoing right now. We have bid on some and have not been successful. A couple, we -- I believe we only bid on one of the ones that were actually under contract on that, that was a bidding process, and we won that one. And we weren't even the high bid, but we still managed to win it. Others, I'll give you an example. We bid on one in Edmonton. We kind of looked at it. It was brought to us, and it went out and it's sold at a low 4 cap and I was kind of bewildered a little bit. And so we do see that in some of the markets, like Montreal is very competitive. We missed out on one last week that I thought we had, we were pretty close on it. And so it is competitive. It's really competitive. But in saying that, we do have a pretty large pipeline of non-marketed opportunities. So I feel we can add a significant amount of property still without getting into that hugely competitive bid process.
Okay. That makes sense. And not to pin you down on any specific number at all, but just relative to maybe what was announced or completed in the first half, how do you think the volume could look in the second half?
I'll say this. I think it's going to be substantial. Every time I give out a number, we seem to blow rate by it, so I'm hesitant where -- we have quite a bit in the hopper right now that we're in various stages of negotiation and due diligence and whatnot. So it will still be extremely active, second half of the year, second -- especially last quarter.
Okay. And then I guess, just shifting to the operations of the portfolio and as the portfolio has transitioned to being primarily industrial, do you have a sense of the potential rent growth we could see from the industrial assets over the next 1 year or 2? I mean, in the more primary markets, we've seen some pretty aggressive mark-to-market opportunities. Just wondering, in your more secondary market portfolio, what you're seeing.
Yes. So Kyle, we don't actually have a lot of lease renewals coming up in the next 1 year or 2 on the industrial side. Where we do see some opportunities is the London portfolio that was acquired in April. There's some 2022, 2023 lease renewals there, where we should be able to get some pretty significant upside. But -- due to the longer-term leases, generally, we have in our industrial portfolio, we don't actually have a lot coming up for renewal. We had one space that came up in Montreal that we got a pretty good lift on, and we'd expect to continue to see that as leases do renew. But just 2020 -- the rest of 2021 into mid-2022, we won't see a lot of renewals. And then we'll see some opportunity in 2022 on that London portfolio and then into 2023, 2024, 2025.
Okay. Great. And just one more for me. Just on industrial intensification or expansion within the portfolio, could you comment a little bit about the opportunity that maybe exists there for you?
Yes. In London, we have -- it's pretty large. We're getting drawing together for, probably, I'd say, 550,000 square feet of potential that we're looking at. So that one -- that portfolio alone has a significant amount right there. So I know one of our buildings down in St. Thomas has the ability to expand significantly on. So we do have quite a few that have quite a large land portion. So London would be the one that we would focus on near term. Just from a supply/demand, the vacancy there is pretty low and the demand is pretty high. So it makes sense for us to take some risk and, perhaps, build someone's back. And I think by the time we would be going, we would have it filled. So it's probably the market that you'll see us tackle first.
Okay. Do you have any thoughts on what the development yield would be, whether it's an exact number or just a spread over stabilized?
Yes. I think it would be around 8% is my guess right now, and depending on where construction costs came in and everything so -- which would be decent because you'd probably look at the value of -- I'm hearing now crazy enough sub-5 in London. So it's -- things are moving across the board.
Next question is from Joanne Chen with BMO Capital Markets.
Maybe just sticking on the -- with respect to the acquisition side of things. The market's focus right now in this environment is still kind of similar to what you guys have been targeting?
Yes. We -- I guess I'd call it opportunistic. So we're pretty active in the markets that we're in. And I am actively looking in Quebec, Montreal area. I'm actively looking in and around the GTA, and I'm trying to find things that make sense for us from a cap rate perspective. So we are seeing deals. We're seeing a number of them, but overall, I'd say you just see us continue to grow in the markets that we're in right now.
Okay. And I guess I think this was kind of already brought up, but given a lot of new stats and data came out this week amongst your peers, it hasn't really changed in terms of some of your negotiations or whatnot. You haven't really seen that you've just given that most of the deals that you guys are targeting are off market, right?
Yes. They're off market, and we've had a number of them that we've been working on for a while, so that bodes well for us. And we do have a vendor in London that has substantial portfolio that we're continuing to talk with on additional product there. So it looks pretty good for the next several quarters, anyway. I think it's going to be pretty active.
That's good to hear. And could you maybe just -- I know we thought it was nice to see that 60 bps of compression in cap rates since the beginning of this year. But could you maybe provide some color on your portfolio cap rates by region and where most of that compression came from?
Yes. So I think we did provide a little bit of detail on the industrial compression in the MD&A by region. So Montreal accounted for, I think, upwards $20 million of compression. And then Ontario, roughly another $33 million. And then in Western Canada, yes, another $2.5 million, $3.5 million. Hopefully, that -- and then there's Richmond separate to that.
Okay. That's right. I did see that. I just thought maybe in terms of on the actual percentage-wise, maybe you can provide some color there.
Yes, I don't have the percentages in front of me. But just based on the absolute number, I could get back to you on something.
Yes, no problem. That's Okay.
We have a follow-up question from Brad Sturges with Raymond James.
Okay. Just following on a lot of the questions on the acquisition pipeline. I guess if you were to characterize what you're seeing right now in terms of 2 buckets deals that you would settle in cash and deals that could be vendor take back of shares, how would that -- how those 2 buckets kind of look like as a percentage for it?
I'd say it's probably half and half, or maybe a little bit more leaning towards the cash [ percentage ] side of things now. So yes, maybe it's 60-40, cash to units on -- like deals that we have slowing.
And given how strong the pipeline is, obviously, you've highlighted some of the areas of liquidity for more capacity and some asset sales that potentially could happen to fall. If the deal flow is that robust, would you consider maybe the portion of the standalone portfolio to help on that? Or how do you think about the timing of pursuing a larger disposition program like that?
Yes. I think that will end up becoming a little bit of a legacy asset. That's a little bit harder to unwind. So what we're targeting are the ones that we wholly own. And then we do have some others that would be easier to move. So we're kind of looking at everything, and it depends on the pipe and how fast we execute on it. So the reality is we do have some liquidity right now, so that's great. And then we move a couple of assets here and there, that's additional liquidity. We have liquidity in Richmond that we can pull out on. So at the end of the day, I think we're fairly liquid right now. So I think things are pretty strong on the acquisition from being able to pay for a fairly decent-sized transaction.
This concludes the question-and-answer session. I'd like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Perfect. I just want to say thanks to everyone for attending. It's been a great quarter. Things are taking off, and we look forward to our next results call.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.