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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 Fourth Quarter Conference Call. [Operator Instructions] And 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.
Welcome, everyone, to the 2017 year-end results conference call for Nexus. Joining me today is Rob 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 on sedar.com for cautions regarding forward-looking information and for information about non-GAAP measures. I'd like to begin by saying 2017 was an exceptional year for the REIT. Net income was up 50% from 2016, AFFO per unit was up 8.4% from the previous year and I think, most importantly, our AFFO payout ratio declined to 83% from 89.1%, demonstrating our acquisitions were truly accretive. We completed a merger in April with the former Nobel REIT and also completed a significant portfolio acquisition in July with the Sandalwood purchase, increasing up our presence in the Québec market and increasing our total assets by 156% from the previous year. In the second half of the year, we focused on successfully integrating the operations of both the Nobel and the Sandalwood platform. From a leasing perspective, the overall portfolio, excluding 2045 Rue Stanley, ended the year at 94% occupancy. At 2045 Rue Stanley, tenants have now been secured for approximately 70% of the building. Chambre des Notaires moved in, in January, occupying approximately 46%, and the full lobby upgrade is complete. The building is now showing quite well. The strategy announced in our last call to acquire a national broker in December has proven to be successful. We are seeing increased traffic and have been engaged with several potential tenants. On the acquisition front, we are in advanced negotiations on a number of properties. We anticipate that in each case, the portion of the purchase price will be funded by the vendors taking back equity in the REIT and no arms-length equity financings will be required. We anticipate press release and details of the transaction shortly. We're also in the process of selling 2 non-core properties and more details will follow on those and we expect to close no later than the second quarter. I'm going to hand it over to Rob Chiasson, CFO of the REIT, to review the financials.
Thanks, Kelly. As Kelly mentioned, we had a strong year in the Nobel and Sandalwood acquisitions are meeting our expectations. NOI for the fourth quarter of $8,161,267 was down approximately $250,000 as compared to the third quarter. In the third quarter, NOI included $150,000 termination fee relating to approximately 26,000 square feet of GLA. In the fourth quarter, the space was vacant as arrangements to fill the space were underway. A lease was finalized for the remaining terminated space in March of this year. The new tenant is either expected to produce higher NOI than the terminated lease. Seasonal costs -- snow removal, holiday promotions and utilities -- were higher in the quarter as compared to Q3. Overall occupancy for the fourth quarter was relatively unchanged from the third quarter and the former Edgefront portfolio remains 100% occupied. General and administrative expense for the fourth quarter included 2017 bonuses. Going forward, bonuses will be accrued and expensed quarterly. Q4 AFFO per unit of $0.048 per unit is up 6.2% as compared to Q4 of 2016. AFFO per unit for the fourth quarter, backing out the bonuses expense, was relatively unchanged as compared to Q3. AFFO per unit for the year of $0.195 was up 8.4% as compared to 2016. The Nobel transaction was completed in April and the Sandalwood transaction in July. 2018 will see a full year of earnings contributions from these transactions. The AFFO payout ratio for the quarter was 82.8%, up from 79% for the third quarter when excluding the termination fee income. The increase in payout ratio was primarily due to 2017 annual bonuses expensed in the fourth quarter. Our debt-to-total assets at December 31, 2017, was 54% compared to 54.8% at September 30. We have 3 mortgages maturing in 2018 with a total principal value of approximately $13.5 million. I'll now pass it back to Kelly.
Thanks, Rob. So to reiterate, I think, the REIT had an outstanding 2017. Our overall metrics continue to be one of the best-in-class in the small cap space. The management and the board are very highly aligned with our unitholders, and we continue to strive to be the next blue chip Canadian REIT. We are very bullish on 2018 and the potential opportunities that we are seeing, and we'll be looking to continue to build upon our 2017 results. We're going to now open up the call to any questions.
[Operator Instructions] Our first question comes from Stephen Boire of Echelon Wealth Properties -- Partners.
I just had a quick question. Kelly, you mentioned quickly potential asset sales, so I was wondering, how much -- or what should we forecast for this year in terms of asset sales?
Well, we haven't gone over the portfolio as a whole yet. There are some that we've identified -- lightly identified as we call them non-core smaller assets that we're looking at. So I'm just hesitant to give a full guidance number on that because we haven't come up with the full number yet. But we are in discussions on 2.
I guess, Stephane, it'd be fair to say these are unsolicited offers. We're not actively looking to dispose of anything.
Okay. That's good. And also, Kelly, I think, you mentioned potential acquisitions. And I know that you mentioned also acquisitions on the previous call that were -- that could have closed in Q1 or Q2 this year. And so I was wondering, could you provide an update on the acquisitions you mentioned last quarter and your -- basically your acquisition pipeline in general for this year? And also, do you perceive any significant changes in the -- on the acquisition environment this year?
So I guess, I'll give this guidance. So sometimes, when I give the guidance, we look at -- a lot of the time, in the capital markets right now, it would be tough for us to raise equity just from a cost perspective, so we are looking at unit deals again. And we're -- I'd like to say, we're going to be very highly successful in completing a few of them by the end of the second quarter, for sure. I'm not going to give guidance on how many because they're still getting close in the negotiation, but I would say, it'll be a relatively active year for us. Without giving a straight number on that, we will be able to complete, I believe, a number of them.
Our next question comes from Brad Sturges of Industrial Alliance Group.
On Stanley Street, the 70% pre-leasing, I guess, excluding the Notaire, what's the timing of that becoming -- I guess, the additional occupancy becoming income-producing at this stage?
Yes, we have, I think, about 40 -- just over -- about 4,500 square feet in June on one of them, and then the other 2 that we have right now look to be end of the year, November, December. So they're in the -- we're sitting it out, doing the construction for their space, as we speak.
In terms of leasing up the rest of the building, how are the prospects looking right now?
It's pretty good. We actually -- it has been a bit of a challenged one. There is construction right next door to us, so that has made it a little slower than we thought just because, on some days, egress in and out on Stanley is a little tough with the construction. So it's put us behind schedule a little bit. But from what we're seeing with the new broker and everything, we hosted, I think, a broker reception, breakfast reception that was well-attended. So we have, I would say, 1, 2, 3 solid prospects for 1 -- at least 1 or multiple floors. And then, another 3 or 4 solid prospects that would take up balance of partial floors that we have.
And in terms of pro forma expectation, still, everything's tracking as expected right now?
Yes. Tracking there, or even, I would say, maybe $1, $1, $2 higher depending on the day.
And in terms of the, I guess, the vacancy in Victoriaville, and it's been released, how did the new rents compare to the previous rents in the space? And was that like a January 1 occupancy or was it partially in the Q1?
I guess, there's 2 components to that, Brad. There's a tenant in a neighboring space that's moving into approximately 3,000 square feet of the terminated space and then there's a new tenant that's moving into the remainder of the space. The total GLA that we're earning rents on is a little bit higher, but the previous tenant wasn't paying rent on the full space they were occupying, so you've got a bit of an increase in the GLA. And overall, our rents should be higher. There is a percentage component, but we do forecast that we will be favorable to the trends we had previously. The new lease was signed in March for the remainder of the terminated space and that tenant -- I'm not sure they're completely in occupancy, but they have been moving in over the last -- in the course of the last month or so. And so full occupancy will start very shortly if it hasn't already. And then, we're doing some work to get the neighboring tenant into the 3,000 square feet, which is being completed.
And what would be the -- I guess, it's just redemising walls? Would there be any work that needs to be done to the space at this stage?
Well, yes, some work with respect to the dividing wall and also with respect to the grade that's being completed. Nothing terribly significant.
And thinking about NOI, I guess, more on a -- for a full year basis 2018, what's your general expectations this year for the existing portfolio? Is it -- any material nonrenewals you're expecting, or is it generally in the 1% to 2% range, I guess?
No, I mean, I think, we see consistent 100% occupancy in the Edgefront portfolio. We'll generate about another $120,000 in CPI increases in that portfolio. We'll have -- we have rent increases that are scheduled on the others as well. Those get straight lines, so they don't necessarily impact NOI, but do impact AFFO. We do have 1 or 2 nonrenewals in the former Nobel portfolio, but smaller building and smaller spaces. Kelly, do you want to add to that or is that...
Yes. I mean, some of the -- there's I'd say 2 challenging buildings in our portfolio. And some results you see on execution in Cote de Liesse. The 2 smaller buildings that we have that have had -- announced a couple of tenants vacating. Mascouche -- looks like we're going to be able to lease up fairly soon, which would be good. And then, Cote de Liesse will be full-on leasing effort. Stanley and Cote de Liesse would be our, I would say, our real 2 main vacancies in the whole portfolio. In Reverchon, one of our properties, we're successful. One of the largest, Sierra Flowers is renewed, and we've actually expanded them so we had to do a little jiggling around there and moving up some tenants. So we've got 1 unit there, but that always leases up very quickly. So overall, we're in good shape. It's full focus on Cote de Liesse, I'd say, and Stanley.
And I'd say, the Sandalwood leasing team has done a great job on that portfolio, and we've maintained our occupancy levels there, no concerns.
Yes.
Our next question comes from Himanshu Gupta of GMP Securities.
Just your thoughts on the distribution policy. Payout ratio remains low. Was distribution increase considered for this year?
No, it wasn't. We have a number of things that we're looking at from the acquisition perspective, so when you're completing a deal without layering on too much debt, you need some cash to close and legal and due diligence costs. So for now, at this level, we're going to keep it flat where it is. In 2018, if we're able to get a number of these deals completed, which I'm extremely hopeful that we're going to be able to, we'll probably revisit it maybe towards the end of the year for 2019.
That's fair enough. And then, talking on the acquisition pipeline, I know you can't give guidance as to dollar amount, but what other target acquisition markets and which asset class? I mean, do you want to maintain that 50% ratio for the industrial?
Yes. I mean, we -- I'd say, a number of the properties that we're looking at are industrial. So we have some, I'd say, some out West that we're looking at. And from an industrial side, I'd say out West, and that's from DC on. And then, we have a couple that we're looking at in Ontario. So overall, right across the country, but kind of an Ontario westward focus right now, for now, and unless something opportunistic in Québec if something comes up that we'd really like.
Sure. And there was a small fair value gain in the quarter and cap rate was adjusted 15- basis points down to 6.98%. Just wondering, is it any specific geography or asset class? I mean, is it Montréal or is it any other region, which brought down the cap rate by 15- basis points?
Montréal came down a little bit. We acquired a property in Barrie, Ontario in 2015 that we had appraisal update completed on, and we saw some valuation gains there. We also completed an acquisition in August of 2015 in Calgary, and that particular property has built in approximately 2% rental rate increases each year. So a combination of NOI growth on that asset and a little bit of cap rate compression. That asset generated probably just a little over 50% of our increase in valuation.
Sure. Yes. And just final question then. Any -- I know there was a change in management structure, so any update on the replacement of CEO position?
Yes. Well, I'm in the midst of, I guess, my final structure. We'll probably structure it a little bit different going forward, where the Senior Vice President type of East that would handle the Québec market. And then, when warranted, if a portfolio comes up for the West that requires active management, we would look the same there. So getting relatively close on the final structure, and hopefully, we'll continue to be able to announce something in the near future. I just really want to make sure what we have is the structure that works best for us going forward and sets us up for future growth.
[Operator Instructions] Our next question comes from Kyle Stanley of Desjardins Capital Markets.
Just a few questions from me. So on the Stanley property, how have the rents been on the newly leased space? Kind of line with expectations or?
Yes, absolutely. They're completely in line with our underwriting and everything that we've had.
Okay. Great. And is there a rent-free period on any of the secured space?
There is. So we probably don't want to get into details as we are negotiating leases on remaining space. But yes, there is some rent-free period. But the timeline that Kelly mentioned, June, November, those are when the tenant commences to actually pay rents.
It's sort of fixturing.
Okay. Perfect. And I guess, just -- so the other income was up sequentially on the back of the asset management fees from the Sandalwood properties. Do you expect the Q4 number, is that a good run rate?
No, I would say, probably $125,000 a quarter would be a more normalized run rate. We may see some more construction management fees in certain quarters but generally in around $125,000 a quarter.
Yes, the construction management fee is going to be a little bit lumpy here and there because as we set out space in Stanley, we do have construction management fee that we receive from our partners. So it will be a little lumpy as we continue to fit out the building.
Okay. Great. And then, just the last one, so it may be a bit early but there's a big chunk of debt maturing in 2019 that's -- including the credit facility. So I'm just wondering how you're looking at managing this. Would you look at terming out the credit facility or something like that?
Yes, I mean, the credit facility, even as it's currently structured, we had fixed term, fixed rate borrowings for the vast majority of it. We do have some of BA borrowings under it and prime rate advances. But from the start, we've sought certainty in terms of rate and term, and we'd be looking at either renewing and expanding the credit facility or possibly swapping some of the debt out for traditional mortgage financing.
Okay. And then, I guess, just looking at those traditional mortgages, how are the rates maybe kind of currently versus what's in place, what are you seeing there?
Yes, so I mean, the biggest chunk of that credit facility is in that 3.9% and then we have another chunk that's fixed at 3.63%. So we're seeing rates currently that would not be significantly different than the 3.9%, possibly a little bit higher than the 3.63%, but not significantly so.
This concludes our question-and-answer session. I'd like to turn the conference back over to Kelly Hanczyk for any closing remarks.
Yes, I just want to thank everyone for attending the quarterly call. We are really bullish on 2018 and hope to have some announcements in the very short order. So very excited about the possibilities in our growth aspects for this year. So we will chat again next quarter. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.