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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 Industrial REIT Second Quarter 2023 Results Conference Call. As a reminder, all participations are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Kelly Hanczyk, Chief Executive Officer. Please go ahead.
I'd like to welcome everyone to the 2023 second quarter results conference call for Nexus Industrial 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.
Since second quarter has gone and as expected with our portfolio providing now 4.3% same-property NOI growth as compared to Q2 2022. We have been active on the acquisition front to date, but we will see this slow as we focus our on our developments, dispositions and reducing our current debt and proactive management of our existing portfolio.
During the quarter, we purchased 192,000 square-foot newly built distribution center in Laval, Quebec, a 304,000 square-foot newly constructed distribution center in London, Ontario, which was a unit deal completed at a significant premium to today's trading price and a 264,600 square-foot distribution center adjacent to the London Airport -- London, Ontario Airport where market rents are approximately 170% -- 175% higher and in place rents with a short weighted average lease term of just over two years. In addition, we sold one of our retail centers in Victoriaville, Quebec. And just after the quarter we purchased 141,000 square-foot newly built distribution center in Burlington, Ontario.
As a result of these transactions, our industrial NOI weighting is now over 90% and will continue to grow in 2023 as we add another 336,000 square-foot of industrial property in another unit deal at a significant premium and we shrink the footprint of our remaining retail and office assets. We're in the process of marketing our three suburban Montreal office assets as well as hosting some initial conversations on the Sandalwood portfolios.
On the development front, we are moving along on the approximately 96,000 square-foot addition to our building at 1285 Hubrey Road in London, Ontario. And we're continuing with negotiations on a deal that will provide us an outside return of over 10% upon completion. At the Titan Industrial site in Regina, Saskatchewan that was acquired in February of 2022, walls are now erected on the 312,000 square-foot new building we’re constructing on 22 acres of excess land.
As mentioned previously, we have assigned lease in place for a minimum 200,000 square feet at this site and have an offer in play for a portion of the balance of space. This is on schedule to be complete for a late spring 2024 delivery. We'll also be proceeding in the fall with an expansion of an existing tenant in the Southwestern Ontario portfolio to add an approximately 70,000 square feet to their existing premises. We purchased 18 acres of land adjacent to this site to accommodate the expansion and upon completion we’ll earn about approximately 9% cash and cash return.
In Richmond, BC, we have received partial occupancy and are working to receive full occupancy permits for the newly named Belvedere Sports Club. They're currently in a membership drive and we hope to have them live and operational for September or October. This will be a significant boost to our FFO, once the tenant commences operations.
I'll now pass it over to Rob to go over the REIT's financials.
Thanks Kelly. Year-over-year same-store NOI was up $900,000 or 4.3% for the quarter, primarily benefiting from continued strong leasing lift in Southwestern Ontario and Montreal. Two tenancies in London, Ontario make up the bulk of our lease expiries for the remainder of 2023. We ultimately expect to see significant lift from re-leasing on these spaces which are currently in transitioning and fixturing through Q3 and Q4.
As anticipated, Q2 G&A expense decreased as compared to Q1 with the timing of RSU vesting resulting in higher Q1 expense. As Kelly mentioned, the repositioning of approximately 60,000 square feet at our Richmond, BC property is nearing completion and we expect to start seeing an approximately $750,000 positive quarterly NOI impact from this.
Interest rates pushed higher in the second quarter and the amount of debt we have on the balance sheet increased to fund acquisitions. We have one more acquisition complete in September, which will, which is a unit deal where the vendor will take back approximately $27 million of the purchase price of units valued at 11.30 per unit.
With the trends continuing to grow quickly in the Southwestern Ontario and Montreal markets in particular, stabilized NOI used in valuing our investment properties increased in the quarter and net of some cap rate expansion applied, we had a fair value gain.
At June 30th, we had approximately $88.6 million undrawn on our credit facilities and we had a $569 million unencumbered asset pool. The Burlington property acquired in July was added to our unencumbered asset pool. The last acquisition we have to close in 2023 will be financed with a combination of Class B LP units and debt. We will also finance our committed development projects with debt.
I'll now turn the call back to Kelly.
All right. I'll open up the call to any questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first quarter comes from Fred Blondeau of Laurentian Bank Securities. Please go ahead.
Thank you. And good afternoon. I have a few questions on the Richmond project, if I may. First, I was wondering if you could give us a sense of the appraisal at Q2 '23?
Yes. So, we don't have an updated appraisal for that property yet, but it's -- we valued it on our books based on prior appraisals and in place NOI.
Okay. Can you remind me what was the -- like, is this the one at the end of 2021 or…?
I think, we last had it appraised -- yes, that would probably have been when, yes.
Okay. Got it. And then, you mentioned pickleball. I mean, I guess they're not paying any rent for now, but what would be the timeline before they start paying?
Yes. So, they're in a membership drive. I just was there last week. That's actually pretty good. And they had a little mini opening, but they haven't got full occupancy permit yet, because there's kitchen and a number of different things. But the pickle badminton, paddle, when their membership, it'll probably be slightly staggered. So I think September will be staggered and I'm hoping that October is when the full kicks in.
Okay. Got it. And then, can you remind me the timeline for the 74,000 square feet addition?
Yes. I haven't made a decision on that yet. Our focus is getting this one complete and ramping, and then I'll take a good look -- hard look at what we do, whether we exit the site in its entirety or we build, and then exit the site. So, one or the other, but focus has been on getting it complete.
Got it. No. That's totally fair. And that was my last question. I mean, I guess, you're still comfortable with exiting the site no matter what, around summer next year. Is that fair to say?
Yes. I would think next year at some point, yes.
Our next question comes from Brad Sturges of Raymond James. Please go ahead.
Just to, I guess, talk through -- or I have a couple questions really related to your financing strategy. I think you talked about slowing down on the acquisition side and being more focused on debt repayment. I think the latest acquisitions that you've been funded through unit deals or on the line, just given the size of the unencumbered pool there, is there an ability to put some secured debt on place and some of the unencumbered assets just to repay down the line, or what's your thinking around how you handled the amount of -- the amount drawn on the credit facility right now?
Yes. I mean, I think there is an opportunity to put mortgages in place and we potentially could use mortgage financing to pay down the unsecured facility. However, there's also the opportunity to increase the -- to the unsecured credit facility and to sort of wait to fix our interest costs based on forecasts of where interest rates are going rather than locking in on mortgages now potentially at the top. But yes, we're currently in discussions with respect to upsizing the credit facility would be the way, we'll very likely go.
And if you were to look at secured debt costs right now, where would that be?
Yes, it's probably around, it depends on the assets, but probably around 5.75% to 6%, somewhere in that range, for a five-year term.
And if you're successful on some of the asset deals you have planned, I guess, is the initial thought to then repay debt from those proceeds?
Yes, correct. Yes.
Okay. Just last question, just when I'm thinking through on the leasing side of things and just looking at your 2024 maturities, it's obviously quite weighted Ontario and then you've got a little bit in Alberta. What would you expect in terms of your leasing spreads when you look at those two markets? I think, we have a pretty good understanding of what Ontario looks like. Just more curious, I guess on the Alberta side of things.
Yes. So, I think Alberta will be -- there'll be a little bit of lift, but I think it'll be relatively flat. We have a number of smaller pieces that are coming up, one of which being our Canada Cartage. They're all in around 23,000 [ph] square feet for the most part, with the exception of Newly Weds Foods.
Yes. We had two -- so I think, yes, in fact, we had two, one is Canada Cartage, where we've actually purchased a newbuild that they're building, that we'll close on, I believe February 1 of next year. We'll get that site that we have it up for re-lease right now, now that we know a firm closing date, which is February 1. And we have an additional 6 acres there. So, we're toying with the idea of either in the short-term, we'll probably lease it out as truck parking and maybe have a slight drop, because that was a long-term lease that has been having year-over-year increases every year. So, it's gone out of market. So that was one of them.
And the other one we had was Northern Mat & Bridge, which we've renewed. I think it begins next June. And so, we took a drop in rent. Well, I still think it's a decent rent profile and is another one that has been growing by CPI for 10 years. That was signed early in the oil boom. So, that one affected us as well. I think the balance of the ones that we have are pretty much in and around market.
And then in Ontario, we're going to get significant lift. We've got our property in Cambridge that comes up in 2024, so 150,000 square-foot facility where we'll get quite significant lift and we've also got another 250,000 square feet Riverview Drive, Chatham, I believe, Kelly?
Yes.
Where, again, we should see some pretty significant lift. So, those two leases, or those two expires at those properties make up 95% of our Ontario expiries next year, and we should see fairly significant lift.
Our next question comes from Himanshu Gupta of Scotiabank. Please go ahead.
So, just on asset dispositions, Kelly, you mentioned some initial discussion on the Sandalwood portfolio. Can you elaborate? I mean, do you have any timeline in mind there?
My timeline still is hopeful for by the end of this year, hopefully, if all goes well. We are in discussions with someone. It's a very good partner of ours. So, we want to make sure it works well for both sides from a partnership basis. So, could be a little trickier than just a typical sale, but we are working on something.
Okay. And can you remind what could be the net proceeds from this asset sale? I mean, what could be the gross amount and how much leverage do you have as leverage on this portfolio?
I'll give you a bit of a range because we're in negotiations, but you know, let's say a $100 million to $130 million of gross proceeds and then it's roughly 50% levered.
50%, okay. Okay. Thank you. And then on the fair value gains recorded this quarter, was this mostly London portfolio, or are there any other region where you did positive fair value adjustments as well?
Yes. Southwestern Ontario, London, in particular, Alberta, relatively flat. But Montreal also -- we signed a lease two weeks ago, I think, at $16 a foot. We're in discussions with another tenant at $18 a foot. So the London market and the Montreal market are moving very quickly. And yes, so, it would be primarily Southwestern Ontario and Montreal.
Awesome. And was there any markets you did like negative adjustments like office or retail or any other place in Alberta?
Yes. We adjusted both stabilized NOI and cap rates for the office portfolio. On the retail side, we didn't have too much adjustment on the retail side. But on the office side, we did take some write-downs, and we also applied some cap rate expansion to certain markets.
Awesome. Maybe last question from my side. On the subject of cap rates, I think you have a London property acquisition coming due. I think that was supposed to be in August. What cap rate should we assume on that property?
We're purchasing it at 6 cap.
6 cap.
And It will be -- it's expected to be completed October 1.
Okay, October. And Kelly, I mean, I think this was negotiated a while back, if I remember. It had some -- the expansion opportunity there. I mean, given the credit facility is in 7s now, I mean almost 7, touching there, was there any scope to renegotiate the price on this acquisition?
No. We've seen incredible value creation from the portfolio. So, it works both ways. And we can also -- just keep in mind on this site, it has substantial land, and we could easily add another 150,000 square-foot addition onto the current property that is just being expanded now.
The other thing to bear in mind is that they're taking units at $11.30 a unit, which is a significant premium to where we're trading. So, there's some give and take there.
Awesome. That’s a good point, by the way. Yes. So, thank you. And I’ll turn it back.
Our next question comes from Jimmy Shan of RBC Capital Markets. Please go ahead.
Thanks. So just a follow-up on the Richmond property. The $750,000 of NOI that comes in, in October. So, the vendor rent obligation of $200,000, I presume that goes away when that comes in?
No. The vendor rent obligation is separate. So, this is just looking to the former space, roughly 60,000 square feet that we early terminated for [indiscernible], and we didn't have [Technical Difficulty] obligation on. And so, we now have zero dollars of NOI or income from that space, then it will go to roughly $750,000.
Okay. And then correspondingly, on the balance sheet, the -- that particular expansion, it's not in the properties under development, right? Like it's -- there's nothing in -- relating to that in the new balance sheet?
No, it's really a repositioning more than in development, but, yes.
Okay. Got you. And then -- I think I've asked this before, but the 2024 expiry in Alberta, there are some 200-some-odd thousand square feet at $17.86. What do you think those spaces will be renewing at next year?
So in Alberta -- so Kelly mentioned that he did an early renewal on one of our leases. And again, they're all roughly 20,000, 30,000 square feet for the most part. But one of those spaces we did an early renewal, that one is reflected in our MD&A, and it's coming down in rent, and I think Kelly spoke to it. I think bulk of the remainder, though, we're looking at maybe some small increases or we're going to hold basically at expiring.
I think, on the remainder, Jimmy, there'll be a slight uptick, but it won't be substantial.
Okay. So roughly 200,000 square feet of the 220,000 would be conservatively flat. Is that fair?
I think the whole thing probably nets out being flat. I think we'll have some -- we'll have some losses on the one that Kelly mentioned and possibly one other, and then we'll have some gains on the rest and then we’ll net out.
Okay. Then last one, just so the credit facility, it was your plan. I know you said you're not going to necessarily put secured mortgages now, but are you planning to do a swap, fixed rate swap on that on whatever is variable today?
Yes. So that's something we're looking at. I mean, we could immediately save -- we could take it to close to what a mortgage rate would be. But -- and we are in internal discussions, but if we're unwilling to commit to a 5-year mortgage rate, the 5-year swap rate would be the same rate. And so, we're probably going to wait and see a little bit before we put additional swaps on.
Our next question comes from Kyle Stanley of Desjardins. Please go ahead.
Maybe just sticking with some of the leasing discussion. Are there any vacancies that you're aware of coming up in the next year or so?
Just -- really just the former Mastec space that has already thinking back to us in April, some of it. But...
We know we have Canada Cartage coming up, right? So I discussed that already because we purchased their new property. They just have to grow the existing site. That's one. So, that will come off for February 1. And looking at all the expiries, we're pretty on top of the majority of all the renewals already for next year and, to be frank, even for the following year. So, there's nothing too major coming up.
Okay. And then do you have any idea what the -- maybe the NOI contribution from Canada Cartage would be? I mean, obviously, it will be offset by your kind of new acquisition, but just, I guess, in the transitional downtime period?
Well, number one -- Rob will grab that number, but number one, I'm hoping to have the majority of it leased by then. So because I now know it's going to be February 1, where we didn't know before because the construction was ongoing and when they were going to get out. So hopefully, it won't be more than a month or so of the downtime, but it will be a small amount of dilution because I think the rental rate is pretty high. So, when we look at the new rental rate, plus the land, the additional land, I'm evaluating whether to build an additional building on there, what the return will be. And I think if we do that that will net it out. But if we just do it leasing the land as truck trailer parking and then leasing it, there'll be a small -- I think a small dilution there.
Yes. So that property is about $2 million a year of NOI. It's not very much GLA, but it's got a lot of excess land for trailer parking. It's a cross dock. So yes, about $2 million.
Okay. That makes sense. Maybe just thinking about the termination income this quarter, did that -- it was very small, but did that relate to the Expedia lease in the office portfolio, that was from?
It did. It was Expedia and one other tenancy. Yes.
Fair enough. And then just on your St. Thomas development, I think you have that scheduled to start in the fall. Do you have an idea of what the cost will be on that? I think you mentioned the yield being somewhere in the 9% range. Just curious on the cost.
Yes. Give me a second. I have it here. Actually, a pretty good deal. So, we actually are returning a return on the land purchase and anything that we spend on construction going along, we have, I believe, a 6.5% return on that until we finish the construction, at which point it turns -- it's based on a 9% cash on cash. So, I think total costs with the land is somewhere around $18 million, $18.5 million.
Okay. Perfect. And then just the last one. I mean, in your kind of prepared remarks, you did talk about obviously slowing down on the acquisition side and maybe focusing on reducing leverage a little bit as more of a near-term focus. Where would you like to see that go? Obviously, it depends on your success on the capital recycling side, but where would you like to see that trend in the next little while?
Yes. I mean, if we're successful, I'd like to see that trend towards the low-40, in and around there. So, I'm hoping that we're successful in moving that. We have some activity in the office, and we are chatting about the Sandalwood. So both of those. And we also have some other opportunities that we're perhaps doing some early leasing on, call them like original type properties that we used to purchase that we'll look at possibly moving out early next year as well. So, it could bring in considerable cash just to reduce the debt and put ourselves in a good position.
Really from an acquisition side, we'll -- with the way cost of capital is right now, we're not looking at buying anything new. However, in saying that, I will do unit deals, and we are in discussions with a few others that I'm hoping next year that we have another fairly major player in a unit deal. And we always tend to do those at a premium. So much better cost of capital.
Our next question comes from Matt Kornack of National Bank Financial. Please go ahead.
I just wanted to quickly clarify because I think you said that you have one remaining acquisition to do with Class B unit deal. There's one line and maybe it's a holdover that says that you have three assets to be purchased for $127 million with $51 million due versus Class B. Is that true, or is there just one left at this point?
Well, I think there's a property that will close in February of next year. And then as at June 30th, we still had to close on the Burlington property, which closed July 4th, I think. So as of today, we have one more property to close on.
And is that February 2024?
That's the -- the close on this year is October. That's the 300-and-something thousand square footer in London.
Yes.
And how -- and for the February 1, how large is that purchase?
I’m trying to remember. I think it's somewhere in and around 20 -- in and around $20 million, I believe.
Okay. And the B units...
Sorry. It’s $35 million.
$35 million. And the B class are on that one, not on...
No. B Class on London in October and then February 1 is cash.
Okay. Fair enough. And then back to Richmond, apologies. But with regards to the vendor guarantee, when would that expire? What is the plan for that again?
It should drop off, I would think, sometime this year as -- because part of that whole redo for the club is there taking additional space in the original building. So it's being built out as we speak as well. So, it's all kind of part and parcel. The main club or the courts -- majority of the courts are in the additional building, but they are taking space in the other. So it will probably, I would think, drop off by the end of the year.
Okay. So -- but that's a seamless kind of -- it will just move up into NOI as opposed...
Yes.
Okay. Fair enough. And then last one for me, just with regards to this quarter on the spreads. Obviously, the Alberta ones existed. But even in Ontario and Quebec, there were some fixed renewal options. Are there -- at least for this year and next, are there any fixed renewal options in the remaining to be leased space, or is that just anomalous to this quarter?
Yes. There's no significant fixed renewals for the remainder.
Okay. And then from the sounds of it, the spreads that you provide in the MD&A, those aren't necessarily what takes effect in the quarter, it's what was leased in the quarter. So can you give us a sense just on the remaining maturities for 2023? I think there's almost 200,000 in Ontario. Would that be getting at a higher spread, or have we already seen that disclosure at this point?
Yes. I don't think we've seen that yet because we've got about -- call it, 190,000 square feet where a tenant at one building is moving into -- a tenant from one building is moving into another building. We've got 120,000 coming up at one building and a smaller tenant is expanding into that space. And so, it's a bit of a -- one of those puzzles with a few moving pieces. But, yes...
Yes. I mean that's probably the largest one. The 120,000 moving from about 40,000 square feet. So we're giving them a slight break on their existing space as they fixture and move into the bigger space, and then we'll get the smaller space back probably for Jan 1, which we fully expect to have leased well in advance.
Yes. But those haven't been tapered yet because there's still some moving parts, and so they wouldn't have shown up yet in the MD&A and leasing activity.
Our next question comes from Gaurav Mathur of iA Capital Markets. Please go ahead.
Just on -- as your leases move towards market, I'm just wondering on tenant demand, are there any signs of pullback or any sort of [Technical Difficulty] that you have seen across [Technical Difficulty]?
So -- it's interesting. So, we're in London, where we have the majority of the renewals, and there just is no space. So, I'm hearing rumblings of potential slowdown of inventories being up and things like that. We haven't seen any effect of it yet, but I am hearing rumblings of it. But the good thing for us is the majority of our leasing is in London, and there's zero availability. So, even if we do see, I think, a slight pullback at some point, the fundamentals there are still really strong.
Okay, great. And just -- what would market rents be in London at the moment?
We've got them somewhere around $11 to $12, depending on the space.
Okay, great. And last question. You touched upon this that you'll be opportunistic on the acquisitions front, and you are finding vendors that are willing to accept unit deals. It's a little -- could you provide a little more color on what sort of -- how is the negotiations going? And how is that vendor pool? Like, what kind of vendors are actually looking to do such kind of transactions?
I mean, there's a number of them, right? Family planning is probably the biggest one as guys are moving through their life cycle and have assets and are looking -- it's much easier to fire units off to different trusts than it is separate building. So, it's really what we're focused on kind of relationship-driven ones, guys that we've met through other vendors who've done them. Like I said, they're extremely difficult to do to get someone to take a significant amount of units. So, they do take a long time. So, we have been working on one for a while, and I'm hoping that, next year, have a nice pool of Class A industrial assets across Ontario and maybe we can start with one and have another family that looks to take back a decent size position.
So, we'll see how it goes, but we'll -- we've got the one and potentially a couple of others that could sprout up this year that we're talking to. But I would say, hopefully, for next year that we have a few.
Our next question comes from Mike Markidis from BMO Capital Markets.
I just want to get back to the discussion on the floating rate exposure in the line? And maybe, Rob, can you just help me understand? I mean, I realize that you're kind of in a wait-and-see mode in terms of what you do there, whether you swap out or do some mortgages. But I mean is it leaving it as is right now because you expect the number drawn to come down as you sell assets, or is it really just a rate gain expecting that longer rates will come down more as we wait?
Yes. I mean it's a bit of a rate gain. Maybe that's not the right word. But just locking in at these levels [Technical Difficulty] may not be the appropriate thing for us to do the time. So, we've been watching [Technical Difficulty]. We had our Board meeting on Friday, and it's always a topic of discussion. So yes, it's really just not liking the rates that we would be locking into for 5 years, [Technical Difficulty] rates are even higher. So yes, it's just not where the rates are [Technical Difficulty].
Okay. And then just for the -- I think you mentioned there's room to take the line capacity up. Is that something that you expect you’re going to have to do as we progress through the rest of this year, just upon the remaining acquisitions and the developments of your plan?
Yes. I mean I think we have two options really. We can finance some of the unencumbered properties with mortgages where we can upsize the facility. And I think our preferred approach is to upsize the facility. So yes, as we continue -- if we complete the last remaining acquisition this year and move forward with development, we will do to either -- we still need to increase our debt, and that's very likely going to be through upside in the credits.
And then just with respect to the -- I don't know if it's aspirational, but I guess the desire to want to get the leverage down into the sort of low 40% range, if I heard you guys correctly. Is that something you think you can achieve just based on the sales that might come to fruition through this year and next, or is it something that's more predicated on the capital markets returning back to your favor?
No. I think we are looking at a number of sales that if we are lucky and get them done. We haven't been shy about telling that we're going to be selling the remainder of the retail and office. So, that drives it down. And if we selectively choose to move some other smaller industrial assets that we have out west, we would do that. And to be honest, even if opportunistically we have someone who comes for one of the larger ones, we will look at it, if the value is there for us. So I think it's just part of the whole reallocation of our portfolio, the high-grading of the portfolio and how we view it as a whole.
Okay. And then, I guess, if you're able to bring your leverage down and pay down the line with being at 7%, would you expect the cap rate on the sales that you're planning would be kind of at a similar level so that you can maintain sort of current earnings and bring down leverage? Is that sort of the plan?
Cap rate on the sales, it depends. I mean some of the bigger ones Kelly is talking about would be lower cap rates, right? They'd be in the 5s…
Yes. It's going to be a little all over, right? If we are looking at the retail and office -- or the retail portfolio, that's actually still generating fairly strong interest. The office will probably be, I'm thinking somewhere, I believe, around an 8% in -- but some other industrials could be 5%. So, it's dependent on what we're talking about.
This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Thank you, everyone. 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.