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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 2020 Fourth Quarter and Year-End 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, sir.
Thank you. I'd like to welcome everyone to the 2020 year-end 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. So the REIT closed 2020 on solid footing. We completed approximately $70 million of industrial acquisitions in the year, building on our previously mentioned strategy to focus on the industrial sector. Our payout ratio was slightly up for the quarter at 86%, was a conservative 82.4% for the full year. Our occupancy for the quarter remained relatively stable to the prior quarter. In the quarter, we had a 25,000 square foot vacancy, effective November 1 at one of our industrial properties, at 41 Royal Vista Drive in Calgary impact our NOI by approximately $55,000 per month. Offsetting this slightly will be a new lease that commenced February 1 on a formerly vacant unit at 935 Reverchon in Québec, representing approximately 12,000 per month. In our last call, we mentioned some potential headwinds on office renewals. We'll have 126,000 square sheet space at 400 Place St. John in New Brunswick come back to us on April 30. This is a former call center for IBM. We are in close renewal discussions with them. And then due to COVID, they have decided not to exercise the renewal option. The space is very well finished out, and it's pretty much plug-and-play for a new tenant, so we're aggressively marketing the space. While we may have had a small hiccup in the New Brunswick portfolio, we have positive momentum at our development site in Richmond BC. We received building permits in early March to begin construction to accommodate our 2 new leases for the former Wärtsilä industrial space, approximately 60,000 square feet. Construction is moving along quickly now as the site was prepped and ready to go once permits were in hand. Upon completion, which is expected to be in and around September, sometime around there. Our NOI will increase approximately $165,000 per month. And as an additional positive, we continue to work with a developer in Montreal on the sale of some excess land, which should prove to be lucrative to the REIT at [ Le olde Saint-Jude ] over the next several years. The developer is moving along with their approvals. And the feedback so far from the city and everything we've had is very positive. So this looks very likely to happen. On the acquisition front, we recently closed on a $14 million 2 industrial building portfolio in Edmonton, Alberta, expect to close -- and expect to close on the $103.5 million 6 building industrial portfolio in London, Ontario, on April 1. The London portfolio, we're very excited about. We think it will provide significant upside as tenants roll over and believe there is significant opportunities to expand the existing tenants, and there is some in the works as we speak. As for the successful close of our $35 million equity offering on March 4, the REIT is in a strong cash position to continue to ramp up our acquisition program. We currently have 2 separate industrial deals for approximately $30 million that we are putting under contract that should be announced shortly. In addition, we are in various stages of negotiations on another $120 million of industrial buildings. We're also in discussions in bidding on additional acquisitions and are hopeful 2021 will continue to be an exceptional year of growth on the acquisition side. On the disposition front, we sold one office property, a small one, 10330 Côte-de-Liesse in Lachine for $2.9 million. We just closed on that the other day. And then finally, as previously press released, we graduated to the TSX. We can now fully trade, a move that should bring additional investor interest, greater liquidity to our unitholders and bring exposure to a larger investment base. And I'll pass it over to Rob to give greater detail now of the REIT's financials.
Thanks, Kelly. Collections remained strong. Thanks again, in large part to our heavy industrial weighting into the composition of our retail portfolio, as mentioned on the last call. We had some items negatively impacting Q4 NOI, as Kelly mentioned, namely $110,000 from vacancy at the Royal Vista Calgary property; $150,000 of COVID-19 related allowances for expected credit loss; the vacancy of our retail space, which was early terminated in Q3, combined with costs to prepare the same space for tenancy, which totaled approximately $125,000, all happening at a time when we were no longer receiving an indirect benefit from the Canada Emergency Wage Subsidy, which would offset. We had a contribution from our accretive acquisitions during the quarter, which partially offset as well. Interest expense was in line with slightly higher interest expense in the fourth quarter related to the financing of newly acquired properties. We continue to have ample liquidity, particularly following the close of our $35 million equity offering with no significant mortgage maturities until December of this year, when a mortgage on our old Montreal office portfolio will mature. We expect to be able to refinance without much difficulty. The equity we issued in the offering, which closed on March 4, will have a slight drag on our results until cash raised is deployed to acquire industrial properties. Any acquisitions at a 6% cap or better are expected to be accretive and as Kelly mentioned, he's busy sourcing industrial acquisitions, which we will put our cash fees to acquire. Partially offsetting the drag from undeployed cash, the Ajax acquisition completed on December 31 was an all-cash deal, which will be nicely accretive to our results. We expect to be able to pull out a significant amount of equity on refinancing the London portfolio acquisition, which will be used to acquire additional industrial properties, balancing out our capital structure following the completion of the London deal with 63% of the purchase price being satisfied through the issuance of units. I'll now turn it back to Kelly.
All right. Thanks, Rob. We'll open up the line now to answer any questions that you have.
[Operator Instructions] The first question comes from Fred Blondeau from IA Capital Markets.
Two quick questions for me. First, Kelly, maybe you could give us a bit of the update on the Richmond project? And what's the action plan there at this stage?
Yes. So while we were waiting for permits, they were busy, I guess, erecting walls and doing everything they could in the vacant building waiting for the permit. So everything was pretty much prebuilt. So they are now -- I think we've got all the permits at the beginning of this month. So about 18 days ago, and they're in there erecting walls, pouring slab floors and going quite quickly. So it's moving along nicely. And by the time the interior finishes, et cetera, et cetera, all complete. I'm looking at -- September is my guess right now, it's kind of where we're targeting. So whether we beat that in this August or whether we're slightly above in beginning of October. So it's going to be in and around there.
So there's been more or less a 6-month delay, if I remember well, you were planning March 1 and then now it's September.
Yes. Just with COVID, the permit office in Richmond has just been brutal, lack of staff, but they were working with them closely. We got put to the top of the pile. And finally, we got them. So we're booming away now.
Okay. That's great. And then my second question, it's a 2-part question. You mentioned the lease expiries for office. What would be your scenario for this year and next in terms of retail leases?
Retail is actually pretty strong, Fred. And we don't have any large leases that are terming. If we looked at our retail occupancy quarter-over-quarter, very stable. And yes, so we actually don't have a lot of exposure on the retail side in the next 12.
Okay. That's great. And also looking at the current schedule, it looks like things will intensify starting in 2023. What are your views today on that front?
Sorry, in terms of COVID or...
No. No. No. In terms of expiries. Sorry.
Expiries of leases?
Yes. Yes.
Yes. So you know what, I have the next 12 months on my radar screen. Beyond that, I'm not aware of any big lumpy expiries. Kelly, are you...
Yes. We look at things 12, 18 months out is our focus. So the 3-year line is a little bit far out right now.
The next question comes from Kyle Stanley from Desjardins.
Maybe just following on with Fred's questioning there, just on the leasing. Do you have a breakdown of what your 2021 lease maturities are kind of by asset class? Just to give us an idea?
We could provide something after the call. I don't have it in front of me right now.
Okay. Right. No worries.
Give me a minute or 2, I could probably give it...
Sure. I mean, I guess to follow along, maybe this is a question more for Kelly. Still along the lines of leasing, but how have your discussions been going? Do you have any like early expectations with where leasing spreads may trend? Just your thoughts there?
Yes. In the office, I see offices up in [ some area ] right now overall, but I don't see too much more expiring in the next little while. On the industrial side, we've done quite well. So that's pretty stable, save and except for the one vacancy that we experienced here. Overall, new leasing is going well, especially in Montreal, where we've seen some lift in rents. And some positive activity where we leased the 16,000 feet that we had vacant for a while at an increase over the exiting rent, which is great, probably about, I don't know, $0.50, $0.75 over that. And in the retail, it's a mixed bag. Our partner, Sandalwood, handles most of the retail leasing. And they've managed to do pretty well in keeping things tenanted, and we've seen increases in some units as we go along. So it's been a bit of a mixed bag on the retail side, office, I'd say, definitely, that's flat when I look at things.
So Kyle, just to add on to that and to answer your previous question, we have about 87,000 square feet on the industrial side that were leases that are expiring in 2021. We have about 125,000 square feet on retail and 82,000 square feet on office.
Okay. Perfect. Just taking a look at your collections. So they improved pretty nicely in the fourth quarter over the third quarter. And I think some commentary on the call last quarter was there's maybe a bit of a slower start to collections in the third quarter just given uncertainty around service. So that was good to see collections look to be strong so far in the first quarter, trending a little bit lower. Would that mostly relate to Québec retail and government-mandated closures? Or what are your thoughts there?
Yes, it's a little bit of that. I mean, what we're hearing from tenants is that they're relying, to a certain extent, in some cases on [ spurs ], to pay their rent. But if we looked at this number a week ago for March, rather than having been 95.3% collected, it probably would have been 92%. And so we're seeing the money roll in. It's just rolling in slower and that's been the story ever since we entered COVID. And if you take a look at the tail end of 2020, we're at 99% collection. I think that's where we're going to get to. It's just taking us longer to collect the receivables during COVID.
Okay. That's fair. So as you kind of mentioned in your prepared remarks, you've been very acquisitive in the last 6 months or so, and it sounds like you have some other deals locked up. Are you able to disclose any kind of like cap rate pricing or whether it be a price per square foot? And maybe the type of markets that some of these deals you might be looking at are in?
Yes. Yes. For sure. So we have a couple that are, say, they're imminent to being press released, and one would be in Ontario, in and around a 7% cap. And one would be in -- one would be in Alberta. And both are in the 6.5% to 7% cap, newer products, solid products, one of them being brand new. So we've managed to source in the off market deals. So it's going pretty well, actually. We've -- we're in discussions on price a bit right now overall. And I'd say it's Ontario, NOS and mixture. So it's been a pretty good first quarter. From an acquisition side just from sourcing and negotiating with them. And so we're quite pleased. And you'd see cap rates in that 6.5% to 7%.
Okay. Great. And are you looking at any markets maybe outside of Ontario and Alberta? It seems like that's where a lot of your growth has come more recently, but is there any interest in whether it be other provinces or the other outer cities?
Yes, for sure. We're looking at Winnipeg. We're in Saskatchewan and some discussions on things. So we see that's a whole different cap rate gain than what we're able to participate in. So in Quebec, we're looking at things all the time. Trying to source stuff there, too. So yes, we're looking, I would say, Ontario, Quebec, Manitoba, Alberta and Saskatchewan mostly.
The next question comes from [ Paul E. Durnan ] from [ Burlington Capital Planners ].
Mr. Hanczyk, I'd have to say that I think management has done a pretty good job handling the COVID, given the circumstances. That's for openers. Now the stock trades at about 80% of book value. Am I right on that?
Yes. Yes. Sure.
Okay. Now every time you make an acquisition, you're issuing Bs, and the Bs are fully convertible into the common share. So you're really hurting the retail investor a little bit. You're diluting the float. Now you have -- instead of issuing the Bs, we -- the interest rates are trending up over the last 6 months, the mortgage rates, I understand that. But over -- if the long-term the average mortgage rate is something like about 7%. So we're still in very attractive mortgage rate territory. And so why not finance more of the acquisitions by taking out another mortgage and not diluting the float? That's what I'm really saying.
Yes. So we can mortgage finance up to, say, 65%, 70% of an acquisition. There does need to be an equity component for each acquisition. And a Class B equity deal is no different than a REIT equity deal in terms of diluting the float. And so we do look -- we have levered up a little more on recent acquisitions than we did in the past, and we've bumped up, up to 65%, 70%, in some cases, to take advantage of interest rates. However, we are mindful of our balance sheet. And we like having a 50%, sub-50% conservative debt to assets. So we're trying to balance the 2. And certainly, we do look at opportunities to finance and to up finance. And so for example, on the London deal, where we're issuing 63% of the purchase price through equity, we'll then refinance those properties and use that to take out equity, take out cash and then use that cash to acquire further industrial properties and sort of rebalance our capital structure. So the London deal is a little unusual in terms of the percentage of equity, but we'll balance that out through refinancing and through adding, as you suggested, adding to the mortgages.
Yes. Well, I think that's in order. And like the idea of 50% debt to asset ratio is kind of a standard normal long-term idea, but it does not reflect these low, low rates. So taking the debt-to-asset ratio up higher is, in my mind, in order.
Yes. So I guess in the current environment, we have low interest rates, but those mortgages eventually mature and have to be refinanced then we just are aware of that and don't want to find ourselves refinancing 4 or 5 years down the road at high rates of leverage when interest rates may not be as low end as appealing. But we certainly are balancing out our capital structure to take advantage of low interest rates in the current environment. So thank you very much, Paul.
The next question comes from Terry Fisher from CIBC Private Wealth.
Again, congratulations on the quarter and getting on to the TSX, and basically doing all the things you said you were going to do. I don't think there's anything the market likes better than a management that says we're going to do XYZ and then goes out and does it. But my question is regarding the industrial side. Given the things that you've already done plus the ones that look to be in the bag, where -- what would your percentage be of industrial when the next few deals are done that you can see coming? And a related question is, how are you able to find these things when there's a lot of other competition out there from other REITs, Dream or whoever trying -- everybody wants to get into industrial but you're able to find, apparently, some pretty good pieces of industrial real estate at pretty good cap rates. It continues to surprise me at least. Anyway, those are my questions.
Yes. So from an industrial standpoint, I think when we close on the London in the next few, we're going to be around 70%, I believe in and around there. And if we continue to be successful and execute on the amount that we're negotiating, that will go up to 75% or above probably 75-ish pretty quickly. So sort of getting there quicker than what we thought, but that is what we've strived to do. And the interesting thing is in some of the buildings and portfolios that we're building, buying here, they already have inherent expansion ability. That we're talking about, even though we don't have them yet. So that could be a nice little pipeline for us to add square footage at positive returns. So they've turned out really well. So how we're finding them. Some of them from long-term relations -- relationships that we've built and spent significant time building. Others, word of mouth. Others, off market deals. So I don't call it lucky, but it seems to be going really well. Our reputation, I think, on closing and doing deals is pretty good. So I think we've had a lot of word-of-mouth off-market opportunities that have helped us grow.
The next question comes from Frank Mayer from Vision Capital.
On the book value of $10.16, could you tell me what the weighted cap rate you came up with in terms of calculating that number?
So we just took book nap. So we basically took equity added back to class Bs and divide it through by the units outstanding. So whereas the analysts would imply a cap rate to NOI, we're just doing it straight off the balance sheet.
Could you opine as to what the weighted cap rate of -- based upon market and based upon your knowledge of your properties? What the cap rate today would be of those properties?
You know what, I couldn't offhand. I'd have to do some calcs to back into it.
Okay. Let me ask you a more general question. Do you think the number that you would come up with, if you were to use a market cap rate would be higher than $10.16 or lower than $10.16?
I think it would be higher.
Can I push it a little further and ask you, would it be modestly higher or significantly higher?
Well, I guess the thing that I would say is our Richmond property, which we acquired for roughly $57 million, we've continued to hold at $57 million until completion of Phase 1, which is building out for existing tenancies or existing leases. And then we're also converting the Wärtsilä space, 60,000 square feet from industrial to much higher-yielding for small uses. We continue to hold that property at $57 million until those are complete. At which time, we expect to have a pretty significant revaluation. We -- our book NAV or our carrying values of our investment properties are at fair value in accordance with IFRS. However, I would say we are not aggressive in determining those fair values. And what we tend to find is that if we have a property updated by way of an external appraisal, the cap rates they're applying tend to be lower than the cap rates that we're applying internally. And then we use that information then to adjust as necessary other properties within the portfolio.
So yes, I would say, Frank, I'd say overall, probably in the industrial side of things, our number is conservative. Because when we do appraise, they're coming back at very low cap rates. So I think you'd see in and around probably a 6% cap or even -- yes. I'd say, overall, on the industrial side of things. So the other ones tend to stay fairly constant on any update we've done so far. So right now, you'd see some upward pressure definitely on the industrial side.
Going to the London portfolio, which, of course, is a very significant portfolio. And we've discussed it in the past, and it's real cool, I think, for you to acquire that portfolio. If I remember correctly, it wasn't at a 6% cap rate, but aren't cap rates in London considerably lower than that?
Yes. Yes.
Anything -- any problems in closing that transaction?
There will be no problems in closing the transaction. It's actually a portfolio I'm really excited about. We think there's significant lift in net rents as people grow as they turn and go from probably gross to net rents. We see a big lift there in a couple of years, especially. And even on top of that, they're great, great managers and have great relationships with the tenants. And we're talking already about tenant expansions and the possibility there. So that could be significant in the portfolio itself. So overall, it's a big win.
You have mentioned expansion space now twice. So can you give us some idea on that portfolio, the $105 million, how many square feet does it currently represent? And how much expansion space do you see in that?
Off my head. I'll follow-up here. I can't remember it. So 1.3 million, I think, square feet. I think, realistically, you could see 250,000 to 400,000 square feet being built on addition there, if we're lucky.
And the price that you're paying includes that expansion space as a land for the expansion? Is that correct?
Yes. Yes. Yes. There's an abundance of it.
Over what time period could you imagine building that extra 250,000 to 400,000 square feet?
I'd say 2 years -- 2, 3 years.
I mean, typically, returns on development properties are considerably higher than returns on leased to properties that are acquired...
Yes.
Given the fact that the land would have like almost a 0 cost, I guess, is that -- is it fair to suggest that the returns could be in the 10% range, double-digits?
It is. I'd say it is fair to suggest that the returns would be in around 10%.
And what would construction cost per square foot be in London? Do you have any idea?
I do have a relative idea. It's probably in an around $90, $100 a foot. The partner that we have down there, are very well connected and very well in the industry. And so I think overall, we would come out better than if we went to a third party. So their experience in building, in taking buildings and refurbishing them, redoing them. So overall, I think we would be well represented by them, and our cost would be on the lower side.
The $90 to $100, does that include development charges?
Yes. You're talking full expansion here. So yes, I think it's somewhere around $100 a foot.
And how much was land cost, if you were to buy land de novo in London per square foot?
You know what, I don't know the land cost, but I'm -- you know what, I'd be guessing right now.
I've heard land in Toronto is like $3.5 million an acre. So it sounds like...
Yes. Yes. Toronto is off the charts. And BC is -- makes Toronto look cheap. So, yes.
Obviously, London is not Toronto, but...
Yes. But you know what, is there's low availability there. And it's a good, solid market with very low vacancy. So we expect big things from it. And if all goes well in the relationship, we'll be adding additional buildings from the same vendor. So I think the future is bright there.
You made a reference to acquiring another 120 million. Does that include potentially some properties from the London vendor as well?
No. That's stuff that we're in different stages of negotiation on. So we'll see how they all pan out, if we're successful. I'm hopeful of 80 of it. And if we're really -- do well, it's about 120, 125, and then we're bidding on some other things. And London, anything we add in and around there from the vendor would be additional to that.
Would it be comparable and as a size to the $105 million portfolio you're currently working on?
No. It would probably be smaller. I mean it would be one, 2 buildings here and there as they look to roll more? One, 2, maybe 3, but bigger -- they're all bigger buildings.
Anything changed in the London industrial markets since you contracted to buy these properties? I mean, had rents increased, vacancies gone down, anything like that?
Well, vacancy was already very, very, extremely tight and rents are pushing. So because there is nowhere to go. And so especially for larger tenants. So at the end of the day, we see the rental stream from here increasing as guys roll.
Thanks, Frank. Just to answer your earlier question, probably about a 6.5% cap. Thanks, again.
6.5%? I'm sorry, I don't remember what the question...
What the average cap rate that would be applied to arrive at the carrying value of our assets.
6.5%?
Yes.
That's for the $10.16? Or is that for the number that you haven't disclosed?
Well, that's -- the $10.16 is our net assets. The 6.5% cap is our investment properties, which make up the bulk of it, right?
No, but I mean -- okay, what I'm confused about is you basically told me in response to an earlier question that most probably the number -- the 2 number was higher than that than $10.16. So what I'm asking is, is the 6.5% in reference to the $10.16? Or is it in reference to the higher number you mentioned earlier?
That would be in reference to the $10.16.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Hanczyk for any closing remarks.
No, I just want to say thanks to everybody for attending the call, and we look forward to our next quarter.
Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.