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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 Q3 2018 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, sir.
Welcome, everyone, to the 2018 third 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.We've had a very successful year on the acquisition front, completing $91.5 million in new deals and are currently in due diligence on approximately another $50 million in assets that if all go well we will close in the first quarter of next year. In the quarter, we concluded on an all-unit deal for $6.6 million retail property in Beamsville, Ontario that once again, like our other deals, was completed at $2.10 the premium to our trading price. From a leasing perspective, the overall portfolio ended the quarter at approximately 94% occupancy, down slightly from the previous quarter. This is mainly attributable to a recent vacancy of 23,000 square feet at 210, an industrial building on Rue Griffith in the Montréal area, as we were not able to accommodate the tenants need to expand. There is positive news on the leasing front for our asset at 2045 Rue Stanley, a property we own 50% interest in, where an entire 7,100-square-foot floor was leased. So occupied or committed space in this property currently sits at approximately 84%, up from 68% at the end of the previous quarter. Rents on 7,600 square feet at this property commenced in November, and we will begin to collect rent on an additional 6,100 square feet in December, 8,200 square feet in June of next year and 7,100 square feet in August of next year. The Sandalwood portfolio continues to remain consistent with our underwriting at approximately 91% occupancy, up slightly from 90.4% in the previous quarter. Richmond portfolio continues to perform as expected, with continued 100% occupancy since its inception. I'll then hand it over to Rob Chiasson now to review the financials.
Thanks, Kelly. As Kelly mentioned, our portfolio once again performed to expectation in the quarter. NOI increased $360,000 in the quarter as compared to Q2. We closed on an acquisition on August 1 that added approximately $100,000 of NOI in the quarter as compared to Q2. Properties acquired partly through Q2 contributed approximately $370,000 of incremental NOI as compared to Q2. Partially offsetting that, dispositions completed in April of Q2 generated approximately $60,000 of NOI in Q2 and no NOI in Q3. As mentioned in our previous call, the property we acquired in Richmond, BC, is undergoing tenant setup and the vendor is obligated to complete the build-out at the vendor's cost and is guaranteed NOI until the build-out is complete and tenants are occupying and paying rents per their leases. For IFRS accounting purposes, this vendor income guarantee is not included in NOI, and accordingly, we've normalized FFO and AFFO to include this. Normalized AFFO per unit increased 0.7% and rounded to -- $0.048 for both Q3 and Q2 2018. The normalized AFFO payout ratio for Q3 of 82.6% was down from 83.4% for Q2 of 2018. Looking at the balance sheet. Our debt to total assets decreased from 54.3% at June 30 to 53.6% at September 30. I'll now pass it back to Kelly.
Thanks, Rob. I'm now going to open up the line to any questions that you may have.
[Operator Instructions] Our first question comes from Stephan Boire with Echelon Wealth Partners.
Kelly, I'm sorry if I missed it, but did you -- or can you provide an update on the acquisition in Montréal that was discussed last quarter?
Yes. So we are in due diligence, and there's 2 separate ones we're looking at right now, call it. One is about close to $20 million, and the other is around $30 million and that one is just outside of Montréal. We're in due diligence, which probably concludes early December. So we'd be looking at closing that sometime in January.
That's the one at $20 million?
Yes, approximately.
Okay, okay. And also it was discussed in the last quarter that you intend to issue units to the vendors. Are we talking about the same kind of transaction for both of these?
The exact same sort of transactions that we've done in the past. Absolutely. So I'd say, from loan-to-value type of range that we've been competing in the past, yes.
Okay, perfect. Also can you give us an update on Richmond and if your budget has changed so far?
So explain that a little bit. There is a backlog of permits in Richmond, which has caused a delay on the Phase 1. So there are existing tenants in place. And so we're just waiting to fall forward on the construction, which really doesn't affect us, because the vendor guarantees the income until the units are fully built out, and then they roll off and their obligation comes off. So what it's really done is just move our start date on the leases, which we've extended with amending agreement, so everyone is fine, and it will continue to go. But I would say now we're looking kind of completion in the first quarter, is my guess, of 2019. And then once we have big progress and we're going and we have the tenants taking the space and moving on, we'll make a big push for Phase 2. So that would then now more realistically be in 2020 type of completion.
Okay, perfect. That answers my question actually. And also on the lighter side, I would say, it appears that the G&A is slightly lower this quarter. And I was wondering if you could provide some details and what could coin that, and obviously, if this is sustainable going forward?
Yes. It was really just -- we had some period costs in Q2 with our Annual General Meeting. We also had some higher professional fees. We had tax returns that we had to file for 2 different periods of 2017 due to the transaction with Nobel. So some of those period costs were incurred in Q2 that didn't repeat in Q3. I'd say $700,000 a quarter gives a good run rate. I mean, as our business grows, we may add a little bit of staff. But it's -- in and around that range is probably good run rate.
Okay, excellent. And just the final one, can you just confirm the cap rate on Calgary? I believe it was around 6.5%? Or is it still the case?
Yes. It was around 6.5%.
[Operator Instructions] Our next question comes from Bradley Sturges with Industrial Alliance.
So the $50 million in acquisitions you're working on right now, is it still safe to say that cap rate range is in the 6.5% to 7% range?
I'll give you a little guidance. It's in the 7% to 9%.
7% to 9%, okay. And in terms of Richmond, so when you say 2020, is that -- I guess, you would say early 2020 instead of late 2019 is now the potential Phase 2?
I hope. I mean, there is a bunch of steps we have to do. And really I want to get Phase 1 kind of complete and then start to really plow forward. So there'll be a number of things, the leases in place and things that we have to get to move forward and still have it approved through our system and everything. So I'm looking probably, I would say, first half of the year of 2020 would be my -- a good guess for me right now.
You're still in the, I guess, discussion phase for leasing that second phase?
Yes.
I mean, we're still in design and the whole approval process on that side of things as well.
In terms of maybe looking at leasing, what is your -- if you can provide a little guidance, what would your view be for same-property NOI for 2019 in terms of growth guidance?
It can be relatively stable. I think throughout 2018, we haven't had an awful lot of vacancy. We'll definitely see some greater occupancy at the Stanley property, and that will come in through equity accounted -- income from equity accounted joint venture. But I don't think there is a lot of vacancy in the portfolio that is problematic. We did lease some space in Victoriaville to a restaurant bar operation. We also leased some space in Magog, which I think somebody had asked about in the last call, and it would have been a good opportunity for us to update that. We leased some less than ideal space that had been previously vacant for some time in that location. But we don't really have a lot of -- I don't think we have a lot of GLA that's problematic that we have great opportunity to lease up.
So no major nonrenewals you're expecting for 2019 at this stage?
We do have one Yellow Pages at Place 400 in New Brunswick and believe there are 8,000 square feet, Kelly?
8,000 square feet. They vacate at the end of this year. So that is one -- I would say that's probably one of the more bigger ones for us. We have 2 in Montréal currently. So I mentioned the one at Rue Griffith and then another 10,000 square feet vacant at our property at Reverchon. And I'm hopeful that we'll have those leases, because those are both fairly, I'd say, historically in demand areas close to the airports and they're industrial. So they currently sit vacant that hopefully we'll kick on and that will add to cash flow and offset any kind of losses that we have. So -- and they're fairly desirable units. So hopefully, we can lease those and that will offset something like Yellow Pages going vacating.
And Cote de Liesse has been a little bit challenging. I think there's one another asset that's been a little bit challenging. Any progress on those assets in terms of leasing them back up?
Yes, we have 2. So we have Mascouche and Cote de Liesse. Cote de Liesse is a bit of a challenge. It's an office building near the airport, so in a very industrial area, which has proven to be a challenge to look at and lease. But we may look at getting rid of that one in the near future or putting it up for sale. Mascouche, we do have someone who we are talking to that potentially could take lease up the remainder of the building. So again, I think that one hopefully in the next quarter or 2 quarters we can have dealt with as well. But yes, definitely, I would think Cote de Liesse is the biggest leasing challenge in the portfolio.
More likely you're putting it up for lease or for sale, I guess, at this stage?
Yes. I think either or -- I mean, at this point, we've had it, been carrying the vacancy. And probably -- look, if you can -- we'll continue to lease, continue to look to lease, but also look at pursuing a sale.
[Operator Instructions] Our next question comes from Himanshu Gupta with GMP Securities.
Just a question on 2045 Rue Stanley property. The committed occupancy is now 84%. What is your expected stabilized occupancy on this property? And by when you can achieve that?
So we have one more floor, the ninth floor vacant right now that we are in discussions with someone. So if we were able to lease that in due time, that would take us to over 90. And I think that's a good number. And then it leaves a spattering of 1, 2, 3, 4 -- 3 smaller units, plus another 5,000 square feet. So I think if we look at it, probably 94% is a good number that -- and I think when we did our due diligence and ran our numbers, I think that was kind of the number that we always ran with. So if we could lease the full floor and then the 5,000 square footer, which are 2 decent units, at least 3 smaller units remaining to lease, and I think that would be a good number.
Somewhere around 70% occupancy would be our breakeven. And so anything above that we're generating NOI. The property is -- sorry, the leases in place or the committed space, some of that rent doesn't kick in into the future. So while we're 84% committed, as Kelly mentioned, some of those rents come online in June and August of next year. But certainly by June, we would be -- that would be stabilized.
By June, it will be stabilized. And while -- I mean, I have you out there. So in terms of fair value pickup on this property from an accounting perspective, I guess, it will be a fair value, because once the full property is stabilized. I mean, you're still carrying -- I think the appraisal value was much higher than what is you are carrying in the books right now?
Well, I mean, I don't think that there will be a huge pickup. When we merged with Nobel, we took a look at it and we did a discounted cash flow and figured out what our leasing costs, et cetera, would be. And the carrying amount is slowly building towards -- I believe it's appraised at around $30 million. And it sits just below that. And as we spend a little bit more on the property, it will reach close to that $30 million market without having to do a fair value adjustment.
I think, though, the positive on it, I think the appraised value at the time would be before Montréal really took off. So I think you'll see cap rates have come down and appraised value may end up being higher.
Got it. Okay. Thanks for that. And just to follow up on the Richmond property, and I know it's already been asked a number of times. Just for my clarification purposes, so there was a vendor NOI guarantee of around, I think, 640k or something in the quarter. That is expected to continue till the end of Phase 1 or Phase 2?
Phase 1. So as that -- as Phase 1 and the tenants move in, the rental obligations drop off one by one as the tenants move in and start to pay.
Right. And Phase 1, Kelly, is still end of quarter 1 now? Or -- I mean, when does this NOI guarantee runoff?
It doesn't expire. So it continues on until the tenants take possession and start paying. So I think depending on the city of Richmond, and that's been a little slow on the permitting side, that I would think -- my guess is end of quarter 1, March, April, it should be built out and the tenants in occupancy, so.
March or April. Okay.
Because there are tenants in occupancy.
Right. But apart from the delay in the project per se, there's no change to overall project economics as such? I mean, in terms of your return expectations or your CapEx to be spent out?
Yes. Same economics. The CapEx is the vendor's to spend to set up. So really the benefit is, it's a delay in start term. So we actually will have longer lease terms at the end of the day. If someone signed a 10-year lease and it was supposed to commence in August, it's now going to commence in, call it, March. So we just picked up more term.
Right. It's a matter of delay of few months here and there. And turning to Sandalwood portfolio, it's been over 1 year now since you acquired the portfolio. Do you have a sense of same-store NOI growth you achieved on this property.?
We're relatively stable year-over-year. So looking at Q3-over-Q3 for Sandalwood -- right, looking at Q3-over-Q3 for Sandalwood, we're down a little bit, but we also had $150,000 termination fee. I'd say we're probably down about $150,000, though, quarter-over-quarter at varying locations. But I think that's more Q3 2017 was a fairly strong quarter. That more so than -- things have been progressing positively quarter-to-quarter. So Q2 versus -- Q3 versus Q2, we picked up a little bit on the Sandalwood portfolio. But just year-over-year, we had some -- we also had some straight line rents that we talked about, I think, in the first quarter that were being booked at one of the properties in the Sandalwood portfolio that were higher than perhaps they should have been. So all in all, I -- adjusting out the termination fees and adjusting out the straight line rents, I'd say it's pretty stable.
Right. And I guess, the occupancy is 91%. I mean, it's picked up a little quarter-over-quarter. What is your outlook in the next 1 year -- I mean, next year, where we can see the occupancy stable? Or do you see some low-hanging fruits or some upside there in this portfolio?
I think some of that vacancy is in locations that have historical occupancies that are not 80s and 90s. I mean, there is some opportunity, but I would expect that the number won't change very significantly.
I think you'll see on the downside, it would swing to 90.5% and on the upside to 92%. That's my guess for the portfolio. And if we're really lucky, up to 93%. So that's kind of the way I look at it for next year.
Right. And just to remind, the 2-year lock-in period will expire in, I think, mid-next year, I believe, right? And then you have an option to purchase balance of 2%?
Yes. I mean -- I think we can always negotiate something if Sandalwood is willing. But there's no mechanism that guarantees us a purchase.
Yes, there's nothing, but we -- like I said a hundred times, we have had a fantastic relationship with the group itself as a whole. So I think the expectation would be at some point in the future, we would probably complete more deals with them or roll additional property. And I just don't know when that time is, but it is something that's always been discussed and we always keep venting around.
Got it. Okay. And just shifting gears to the Montréal property under due diligence. I mean, you mentioned the cap rate to be in the range of 7% to 9%. I just want to get a sense of how competitive is the process out there. I mean, because we keep hearing a lot of bids for Montréal industrial properties and much lower cap rates. So just wanted to get a sense of -- are you seeing -- are you competing against other guys? And -- I mean, if you can elaborate.
No, not typically. Typically, we get them off market, I mean, weekend discussions. And it's a whole different negotiation, because it's a unit deal, takes a little longer and it's a little bit more arduous. But I think at this point, in our REIT, rather than raise equity dilutively at our current price, to complete acquisitions this way is much better. So we have had the opportunity. This deal was introduced to us by RFA, so through them. So at the end of the day, I think it's a good solid deal. It's not an industrial property. It's a mixture of kind of, call it, retail and office.
In that range of 7% to 9%, there is also properties outside of the Montréal area on the $50 million under diligence. So some of that's Western Canada as well.
Okay. It's like a portfolio kind of. Okay. I think that's good. And maybe just one last question. I just wanted to have your thoughts around target AFFO payout ratio. And the payout ratio is still low. And have you had any discussions around the distribution going forward? And what's your target payout ratio?
Yes. I would like to see it, quite frankly -- if we could get successful on leasing, because we've been hovering around the 83%, and we do have some deals coming on that should prove to be accretive. But we do have some interest rate exposure for next year. So my goal is to get it into the 70%, 75% range. That is my goal. And then from there, with the board, we'd have a discussion on, do we keep that additional cash flow to reinvest or do we look at bumping the dividend. And we haven't got there yet. So I'd like to see it try to get to the 75% range over the next year.
Got it. And you mentioned about the interest rate exposure. Are you talking about the credit facility, which is coming for renewal in July?
Just that we have current mortgages on our balance sheet that we'll be renewing in 2019. And as you know, interest rates have been creeping up. So we may have incremental interest costs -- well, we will have incremental interest costs as compared to some of the rates on maturing debt.
This concludes the question-and-answer session. I would now like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Well, I just want to thank everyone for taking the time to call in, and we look forward to speaking again and updating on everything we've talked about at the next conference call.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.