Nexus Industrial REIT

TSX:NXR.UN

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT Third Quarter 2023 Results Conference Call. [Operator Instructions] 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.

[Kelly Hanczyk, executive]

Thank you. I would like to welcome everyone to the 2023 Third Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Robert Chiasson, Chief Financial Officer of the REIT. Before we begin, I would 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. The third quarter has gone as expected with the portfolio delivering 2.5% same-property NOI growth as compared to Q3 2022. During the quarter, we purchased a 141,000 square foot newly built distribution center in Burlington, Ontario for $48 million. And subsequent to the quarter, we closed on a 336,000 square foot newly expanded distribution center in London, Ontario in the unit deal priced at 1130 a unit with our largest unitholder.

We have one more acquisition to close in mid-December, an 84,000 square foot new build in Calgary, Alberta for one of the REIT's existing tenants. After this, we'll be putting the brakes on acquisitions for the time being until market conditions improve. Our industrial NOI weighting is now approximately 91%, and we will continue to grow in 2023 as we shrink the footprint of our remaining retail and office assets. Although there are no new dispositions to announce in the quarter, we are in various stages of due diligence on our three suburban Montreal office assets as well as our office property class 400 located in St. John, New Brunswick. I see about a 50% probability of completion of these deals in today's current market.

On the development front, steel is up on the 96,000 square foot 40-foot clear height addition to our building at 1285 Hoby Road in London, Ontario, where we are continuing negotiations with several groups that should provide us with an outside return of approximately 10% upon completion is scheduled to be in about May or June of next year.

The [Titan] industrial site in Regina, Saskatchewan that was acquired in February 2022. The walls are erected, the slabs is board and interior finishes are being completed on the 312,000 square foot new build we are constructing on 22 acres of excess land.

As mentioned previously, we have a signed lease in place for 200,000 square feet at the site are in discussions with a few different groups on the balance of the space. This is still on schedule to be complete for an April 2024 delivery. As mentioned last quarter, we will also be proceeding in the fall with the expansion of an existing tenant in the Southwestern Ontario portfolio to add what was supposed to be an approximately 70,000 square foot addition, but it looks likely to grow to a 240,000 square foot addition. We purchased 17 acres of land adjacent to the site to accommodate the expansion and upon completion will earn somewhere around the 9%, it could be higher percent cash-on-cash return and will not be a drag on our earnings as we will generate a return throughout the construction process as we incur cost to build.

In Richmond, BC, we have received partial occupancy and are still awaiting to receive full occupancy permits for the newly named Belvedere Sports Club. This has been a tedious process, but it looks like occupancy should be in hand by the end of November. We're working feverously to get the tenant up and running so we can commence rental payments in the new year. This quarter, our NAV per unit has increased to $12.89 versus $12.49 last quarter. We engaged external appraisers to value properties totaling approximately $489 million in the quarter, resulting in a net write-up of income-producing properties of approximately $26.9 million.

One property in particular account for approximately 84% of the $26.9 million net write-up resulting from external appraisals. In addition, an investment property in London, Ontario acquired in the second quarter with in-place rents well, well below market and purchased approximately $24 million [indiscernible] an appraised value was also revalued, generating a fair value increase of approximately $19.1 million in the quarter.

In the development properties, we recorded gains of $16.6 million according to the percentage of construction complete as of September 30 relative to the as completed appraised value. Partially offsetting these fair value gains were adjustments totaling just over $24 million relating to primarily to cap rate expansion, which we've applied to the REIT's properties in Calgary, Montreal and BC. In our transition to an unsecured borrower, we have built a sizable unencumbered asset pool which will afford us financial flexibility for the long term. This will provide us with access to a wider ring and deeper pool of capital resources, including the potential to pursue an investment-grade rating and issuance of public bond securities in the medium term.

We successfully upsized our unsecured bank debt facility in the quarter to $525 million, demonstrating continued institutional support for our portfolio and strategy. This bank debt facility is critical to our transition. We have also entered into a swap agreement in order to reduce our overall cost of debt, $440 million swapped at 5.2%, which removes our exposure to movements in interest rates in the near term. The swap represents the most cost-effective structure while providing maximum flexibility to achieve our overarching strategy. I will now turn the call over to Rob Chiasson to discuss the financials further.

[Robert Chiasson, executive]

Thanks, Kelly. As Kelly mentioned, we completed the $48 million acquisition of the Burlington, Ontario property on July 4 funded with borrowings on our credit facility. We acquired the $56 million London property at a [six] cap on November 1, with $27.1 million of the purchase price settled in units issued at $1,130 per unit and the remainder with borrowings on our credit facility. Our properties performed well. Year-over-year same-store NOI growth was 2.3% for the quarter with some Western Canada vacancies putting pressure on the figure. Without those two tenant vacancies, same-store NOI would have been 3.9%. G&A was stable for the quarter. FFO and AFFO were slightly impacted by an approximately $175,000 unrealized foreign exchange loss in the quarter.

For the remainder of 2023, we have approximately $30 million of mortgages maturing at a weighted average 2.36% interest rate, including a $15 million noninterest-bearing VTB that brings the weighted average interest rate down. In 2024, we'll have approximately $37 million of mortgages with a weighted average interest rate of 4.3% that will mature with the bulk maturing March 31 of next year.

In September 2024, a $65 million credit facility fixed at 3.15% interest will mature. As Kelly mentioned, we've put in a number of -- put in place a number of swaps between August and November, which immediately reduced our interest costs by approximately 130 basis points and significantly reduced variable rate exposure. I'll now turn the call back to Kelly.

[Kelly Hanczyk, executive]

Thanks, Rob. I'll open up the lines to any questions.

[Operator]

[Operator Instructions] The first question comes from Fred Blondeau with Laurentian Bank Securities.

[Frederic Blondeau, analyst]

Two quick questions for Kelly first. Just looking at your lease expiries, I guess, $816,000 and $1.5 million in '24, '25. Could you remind us where does RTL West can fit in your schedule today? And I guess, what are your general views on expiries for the next 2 years?

[Kelly Hanczyk, executive]

Yes. So we have a pretty good handle for the next 2 years. We have actually extended [our RTL] Westcan recently. We added 5 years of term. I believe they expire end of 2025. So we've added 5 years of term to their lease with a continuation. So no step back in rent. So I believe -- it's just with the 2.5% increase year-over-year, that will just continue on in that portfolio. So we have that completed already, which bodes really well because I think that will be one that we have marked for disposition. It doesn't really fit into our long-term strategy. And it's a solid portfolio. And I think where we struggled before on our thoughts of taking it to market, it only had 2 years left of term. So with 7 years left of term on it with renewal options that they've put in, I think it's very, very sellable, and we've got pretty good interest on it.

The balance, I think through next year, we're probably about 40% complete already on renewals next year, one of them -- one of them in Cambridge, that's fairly big, I think 150,000 square feet where we're going to see about, call it, so call it about just under $5 of lift on that, on renewal, which we've signed the offer to lease and is just the lease amendment being drafted. So that's effectively done. So we've got pretty good progress. Another one for next year as a big one is 238,000 square feet with our partner in London, Ontario, which is about 99.9% likely to renew. We're just discussing rates with them on that. So overall, next year, with that one, we'd probably be about 70% renewed already.

So and we're in discussions with everybody already and have quite a few revenues. So it's looking pretty good.

[Frederic Blondeau, analyst]

Got it. And then just to be sure, there's no RTL [Westcan] in your 2025 expiries of $1.5 million, and it's all been pushed to 2030, correct?

[Kelly Hanczyk, executive]

There is one -- there's only one site that we have, which is -- so Fred, the reported numbers for RTL Westcan, they are in those -- they are in the reported GLA numbers for -- I believe they are in the reported GLA numbers for 2025 because as at September 30, the [indiscernible] included.

[Frederic Blondeau, analyst]

Got it. Got it. Okay. And there's one remaining, correct? For 2025.

[Kelly Hanczyk, executive]

It's the only one. It's a small one, but it's contingent on the renewing next door to us, which is on the land lease that we don't own. So they are in negotiations on that. So we expect that one to renew as well.

[Frederic Blondeau, analyst]

Okay. Great. That's great. And then just following up on Richmond, wanted to see if you're still on track for an exit during summer next year or around summer next year?

[Kelly Hanczyk, executive]

Yes, that's hopefully the plan, working hard to try to get occupancy. We thought we had it, but they found some water in the elevator pit, which you need the elevator to work. So we have to do some special paint treatment on the elevator pit because there's a little water table there. But once that's done, I think that's the final little phase to get signed off by the authorities and to give occupancy. So it's -- the plan is to get it going, get cash flowing and then hopefully exit it summer fall next year.

[Frederic Blondeau, analyst]

Yes. No, that's great. And then maybe one last for Rob. What would be your target debt ratio for 2024? I guess it would be a function of dispositions, but I was wondering if you had a kind of a target for 2024 anyway.

[Robert Chiasson, executive]

Yes, I'm not sure I can give a precise answer to that because as you say, it will depend on dispositions. We've got the retail and the office properties potentially the Westcan portfolio that Kelly mentioned, but we should be comfortably below 50%. And depending on the success of some of those dispositions, lower than that, but I can't give you a precise number except to say we should be comfortably below 50%.

[Operator]

The next question comes from Michael Markidis with BMO Capital Markets.

[Michael Markidis, analyst]

Thanks, everyone, and apologies there's an alert of an alarm here in our building. So I apologize for the background talking, but here it goes. First one is just a housekeeping question. Rob, I think -- you guys had a pretty substantial increase in capitalized interest this quarter. If I'm not mistaken, I think it was $1.3 million. But I think you only deployed about $30 million or so of incremental capital development. So could you circle the square there in terms of what caused that, please?

[Robert Chiasson, executive]

Yes. So if there's any catch-up, it's one quarter on the land related to the Regina property, but it's primarily development funds deployed in the quarter.

[Michael Markidis, analyst]

Okay. Maybe we could follow up offline on that, if you don't mind. Just I know that the environment, Kelly, is pretty tough for the dispositions right now, and that's put a little bit of a kink in your plan, so to speak, so -- but with all the RTL Westcan, Richmond, I don't know where you stand on sandalwood if you're still thinking that gets done in 2024. Your ballpark figure, realizing the range could be wide. Like what do you think the total amount of capital would be for those properties that you've earmarked for disposition?

[Kelly Hanczyk, executive]

Yes. I mean I would be pretty surprised if we couldn't move the Westcan portfolio. It's generated pretty good response, and we're not even actively marketing it right now because we did just get the extension. I believe value on that is probably somewhere around $80 million, give or take. Sandwood is -- the value is, call it, in and around $110 million. And I was working with the group to try to do an off-market deal. Kind of gone a little sideways. So we will be underwriting that right now. We do have some take-up on it. We've had especially on the retail side, a lot of inquiries as to it. So I think we'll have some participation. It's really the office that I'm finding the real slowdown on a sale. We have it under contract with someone right now, but I see 50% chance of that being concluded on the end of the month because I believe that's when the due diligence period expires. Plus 400 in New Brunswick, we just put that under contract. So that's got a little bit of time on the due diligence.

So I would like -- I would be fairly confident that we could move through the Sandalwood portfolio next year and I would think the RTL West Can portfolio. And the free office, if we can do I'll be more than happy. But it's just -- it's tough. I mean we -- they're good assets for us. They have terms to cash flow nicely. So it's not a desperation thing here for us. It's make sure we get a proper deal done.

[Michael Markidis, analyst]

Of course. And so I add that all up roughly RTL, Sandalwood and the office, I think that's 80, 110 and 30. And then Richmond, I think you've mentioned plans for that as well. So what would that roughly be?

[Kelly Hanczyk, executive]

That would probably be -- it's probably in and around 100, should be 100, 130.

[Michael Markidis, analyst]

Okay. Perfect. Okay. Last one for me before I turn it back to [indiscernible]. It sounds like you made good progress on your lease maturities I think into next year, 70% done or close to 70% done. Just given what you're seeing now and knowing what you have in the portfolio, what kind of upside do you see next year from those same property perspective?

[Kelly Hanczyk, executive]

[indiscernible] have the number, any -- it's a little harder to just, but I -- when I'm looking at some of the renewals we have, we have fairly significant, but we do have that one we mentioned before, Canada cartage coming off. That we'll have to release, and that will make a dent on our same-store. But from a renewal standpoint, even in -- when I'm looking at Edmonton, we've completed one [as a buck] higher on 72,000 square feet. We've got one at $5 higher on 150,000 square feet. So we're making pretty good progress here, but we did have the Northern Matton bridge that we renewed next year are huge, I think our huge bump.

So we do have a decent bump next year overall on the same store. But our big, very large bump comes in 2025, where the recently purchased one in London sits at 450 in rent, and we'll probably end up somewhere around $12 on that site. It's 200-something thousand square feet. So 2025 is the real big lift on the same-store.

[Michael Markidis, analyst]

Okay. And can you just remind me on the NOI coming off and when it comes off for Canada [cartage]?

[Kelly Hanczyk, executive]

I believe we're -- we're in the transition. So we purchased their new facility, and then they move from one to the other. I believe it will come off at the end of December is what I'm thinking. And then that then they start paying rent on the new facility that we purchased. So the good news is we do have someone interested that we're speaking with right now. So hopefully, you can lease that sooner than later.

[Robert Chiasson, executive]

[indiscernible].

[Operator]

The next question comes from Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Just continuing on the line of question there from Mike. Just so I understand, so beyond Canada Cartage, I think there was reference last quarter to MasTec space that you're getting back as well. Is that the only other vacancy you're expecting at this point? Or is there any other nonrenewals?

[Robert Chiasson, executive]

Yes. So we got MasTec back earlier this year, and we have a small -- well, brand in toy, a small vacancy also in Alberta and Edmonton. But I think other than that, we're not expecting anything, Kelly.

[Kelly Hanczyk, executive]

There's nothing, I would say, overly large. I would say nothing over 30,000 square feet. I mean we do have one end of next year, but it's severe, it's like 30,000 square feet that probably will vacate, but it gives us a lot of time to backfill. So there's nothing -- the cartage is the big that we have.

[Bradley Sturges, analyst]

And with the one in Cambridge and in London, there's -- that's with the renewals that once you get that done, that's like that, there will be no downtime or transition to a new tenant. That's just with existing tenants.

[Kelly Hanczyk, executive]

Yes. Cambridge is fuel. And then the biggest one is in Chatham, and that is with our E&E [indiscernible] and that we're in discussions with. So there's a 99% likelihood of that, obviously renewing. But yes, those are the two big ones that represents 2, 3, almost 400,000 square feet.

[Bradley Sturges, analyst]

Okay. I appreciate the comments just on the, I guess, the work or the effort on the disposition program. When you think of the potential buyer pool Sandalwood, what would that compensation look like in terms of profile of buyer or the types of groups that you could be talking to?

[Kelly Hanczyk, executive]

Yes. So the ones that have shown interest are private [co.s] -- so nothing from a public side, private equity, different groups like that. So that's who's kind of shown some interest or we feel the calls from not sure if I'd have to split up between office and the retail. It's something that may have to happen. We make lucky and have someone take the whole thing down. So we'll have to see how it goes. But we're underwriting right now so that, hopefully, then we can -- December is probably not the best time. So January probably a launch that we would go to a market.

[Bradley Sturges, analyst]

And from like an industrial point of view, just beyond RTL Westcan, would there be anything else that you have in the non-core bucket that could be opportunistic for sale at this point? Or is it really the focus would be RTL West Can at this point?

[Kelly Hanczyk, executive]

Yes. I think it will be RTL West Can. There may be one or two small ones as people inquire on them. We have some smaller stuff by the airport in Edmonton that are well tenanted and possibly could look at those if we had interest on them. But nothing right now that's targeted per se, other than that.

[Operator]

The next question comes from Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

Just taking a look at your development disclosure, it looks like the costs in Hamilton and Regina ticked up a little bit this quarter. And there was a bit of an adjustment to the expected yield in Regina. I'm just wondering if you could walk through some of those changes.

[Robert Chiasson, executive]

Yes. So Regina, I think, was primarily an adjustment to layer on PST, which wasn't previously included in the construction cost. So I think that's really what it is because we have a fixed price contract there. And then the Clover Road was a couple of variables. We own -- we have an 80% interest in that property. And so we have to buy out the remaining 20% interest. And so there were some changes in the assumptions in terms of the model, in terms of rents are increasing. And so we're going to be capping out a higher NOI on the purchase of the remaining 20% and so that's really what led to the increase on Clover.

[Kyle Stanley, analyst]

Okay. No, no, that makes sense. And there weren't huge increases just digging into it a bit. You made some commentary about potentially expanding the project in St. Thomas. Nice size expansion there. And you mentioned a yield may be in the 9% or better range. Just wondering how are those conversations going? And what would the potential cost be there and potential timing on breaking ground and then delivery? Just I guess, a bigger update on what's going on in St. Thomas.

[Kelly Hanczyk, executive]

Yes. So I'm in the thick of it. So we -- they have requested 240, so we're in discussions. Originally, we had a 9% return on a 70,000 square foot addition. That might have to increase a little to get to 240,000 square feet in my mind. So it's what I'm working on right now. I think the intent would be -- have that all figured out in December, where I would think they would break ground, January, February weather permitted. So I that's kind of the schedule for there. It's probably somewhere right now around $40 million would be the cost. The good one on that is that we don't really have a drag because we did negotiate the return on costs as construction is completed. So there'd be no real drag on our NOI from that.

[Kyle Stanley, analyst]

And would that negotiated return on your cost as the construction is completed, would that line up with the, call it, at least 9% return you're talking about? Or would it be any different?

[Kelly Hanczyk, executive]

It would be it would be lower than that.

[Kyle Stanley, analyst]

Okay. That makes sense. Last one for me. G&A was down sequentially this quarter, Rob. I'm just wondering, could you provide us with what a good run rate might be going forward?

[Robert Chiasson, executive]

Well, there's always seasonality, I guess, in the G&A. So our Q1 G&A is going to be a little bit higher with the timing of RSU vest, et cetera, and it will depend on the grants. But we're not -- I don't think we're significantly off this quarter, and we probably had about run rate, all else being equal.

[Kelly Hanczyk, executive]

I would use our current run rate. I mean ultimately, our staff levels are staff levels and we're doing well with what we have. So I don't see any huge, huge change to the actual run rate.

[Robert Chiasson, executive]

Yes, I think we had a bit of a spike in Q2, more so than a reduction in Q3, but call it $1.5 million, somewhere around there is probably [the run rate].

[Operator]

The next question comes from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

Thank you and good afternoon. So just on credit facility swaps, I think a fair bit of done during the quarter and post that. How much of these swaps the banks have 1-year options on that?

[Robert Chiasson, executive]

Right. So just 1 second, let me -- so there is a total of $300 million that was done for the banks have onetime options to cancel, one year out.

[Himanshu Gupta, analyst]

Okay. And that will be like September? Or will that be like November?

[Robert Chiasson, executive]

It's August 31, September 30 and October 31, but primarily October 31 of next year.

[Himanshu Gupta, analyst]

October 31. And what is the rate for 1 year right now on that $300 million swap?

What is the interest rate on $300 million swap right now? Put it this way, what will be the expiring rate like 1 year from now when the banks -- if they decide to cancel the swap?

[Robert Chiasson, executive]

Including spread, we're at about 5.9%, let's say, on those. Yes, about 5.9% on those swaps. Excluding spread, we're at about give or take, about 4.2%. And so the question will be whether the 4 year is greater than 4.2% a year out. If it is, we'll very likely get canceled. But the counter question is, where does the short-term money sit? If we've seen some correction of the inversion in the curve, then short-term money could actually be cheaper than longer-term money as it would be in a normal situation, I guess. But yes, hopefully, that answers your question.

[Himanshu Gupta, analyst]

Sure. No, it does. And then maybe like a bigger picture, what are your thoughts on distribution or payout ratio next year? I mean especially in the context of you're talking to West [Kansas] position, Sandalwood position as well. I'm assuming they are a bit high-yielding assets. So any thoughts on distribution [indiscernible] for next year?

[Kelly Hanczyk, executive]

Yes. I think we ran our -- we're not done the budget because probably the payout starts to drift towards the lower 90s. So while we'll have maybe some short-term strain on that payout, it starts to come down fairly quickly as our developments come on and as the new rents kick in. So at the end of the day, it's not something that we've looked at to reduce for sure. So everything right now is status quo. And it's not top of mind to look at. So I hear a lot of rumblings, but we haven't even think it's something that we need to look at as it will naturally drift down towards the lower 90s throughout the year.

[Himanshu Gupta, analyst]

Got it. Okay. Awesome. And maybe just one last question. That Calgary asset acquisition in December, I think that's Canada Cartage. What cap rate should we expect on that asset?

[Kelly Hanczyk, executive]

Yes, it was lower. It was done before. And I believe it's somewhere around 5.25.

[Operator]

Next question comes from Jimmy Shan with RBC Capital Markets.

[Khing Shan, analyst]

Yes. So maybe just a broader question on market rents and kind of what your -- how would you characterize the most recent trends that you're seeing in making rates in some of your key markets?

[Kelly Hanczyk, executive]

Yes. So it's actually been pretty good, Montreal, is still holding up pretty well. we're asking in the $16 to $18 range in some of our assets there. Calgary and Edmonton, where I thought we would have a little pushback on some of the rents possibly, we actually are getting bigger increases than what we originally anticipated. We thought we'd be flat on some of them, and we're actually getting some increases. So the market is still pretty robust, while it is, I guess, I think, peaking in -- when we talk about the increase -- the continued increase of rental rates, it's stabilized. And so we have a bunch -- I mean forget Southwestern Ontario rents are pushing, and I think they're still continuing to push because there is no available space down there. That's a different market in its entirety. But from what I see, rates are stabilizing as a whole, but that still gives plenty of room for a lift on the in-place rents across the portfolio.

So I think you're starting to see peak rental rates in GTA Montreal. I would say London is probably going to peak out hopefully a little higher, maybe around 14. So because we are talking to some people and with that number in mind. So it depends on the facility, the building you have, but rental rates are still pretty strong right now.

[Khing Shan, analyst]

There is a bit of a narrative about kind of limited large [indiscernible] requirements by tenants, but small and mid-bay activity being pretty healthy. I don't know if that's a GTA comment or not, but I wondered if you had any thoughts there or if you're seeing any of that dynamic in your markets?

[Kelly Hanczyk, executive]

It's actually interesting because in Regina, we have the 112,000 square feet -- and we prefer to lease it as one, but we have a couple of people that are each looking at perhaps half of it. So it kind of does work. Same with the London with our 96,000, we have users for the whole thing that we're speaking with, and we have users for half. So there has been a resurgence, I think, in that call it, in that 40,000 to 50,000 square foot niche that I'm seeing lately.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Kelly Hanczyk for any closing remarks. Please go ahead.

[Kelly Hanczyk, executive]

Thank you. Thanks, everybody, for attending, and we will see you next quarter.

[Operator]

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