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spk02: Thank you for standing by. This is the conference operator. Welcome to the NEXO Street 2021 Fourth Quarter Results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Mr. Kelly Hansik, Chief Executive Officer. Please go ahead, sir.
spk07: Thank you. I'd like to welcome everyone to the 2021 Full Year and Fourth Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Robert Chason, the 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 cedar.com, for cautions regarding forward-looking information and for information about non-GAAP measures. So 2021 was a defining year for the REIT. We continue to successfully execute on our strategy of becoming Canada's next pure play industrial REIT, which culminated in a recent name change as of March 7th to Nexus Industrial REIT, which is a name that better defines our strategy and objectives moving forward. In the fourth quarter, we closed on approximately $416 million of industrial acquisitions with strong covenants such as Loblaws, Sobeys, and MRC Globals. The blended cap rate for these acquisitions is approximately 5.13%. For the year, our acquisitions totaled $674 million at a cap rate of approximately 5.7%. As we look forward to 2022, we continue to be focused on growing our platform and deploying the capital raised in 2021. We've closed on an additional 10 high-quality industrial buildings, totaling $236.5 million. at a blended cap rate of approximately 5.12 in the first quarter of 2022. In addition, we are under contract for two additional properties, a brand new build, Strong Covenant Distribution Center in Ottawa, and one in London, which is in the process of having 150,000 square foot new addition being built. These two properties total approximately 167 million, and they're expected to close hopefully in January and April of next year. As you can see, we continue to have a very active pipeline of deal flow, and we have the liquidity to be able to execute on a significant amount of additional industrial transactions throughout the balance of this year. Our occupancy for the fourth quarter was up slightly from last quarter. In the industrial portfolio, our vacancy continues to be mainly a 25,000 square foot industrial space at 41 Royal Vista Drive in Calgary. A new lease deal that was scheduled to commence in January has been slow to transpire, and they're waiting for permitting. So we're hopeful that the deal we had agreed to in principle is successfully completed. But in the interim, we've begun to remarket the space. In Richmond, BC, we continue with the redevelopment of an approximately 60,000 square foot building for two tenants. Unfortunately, timelines continue to get expanded from what we originally anticipated as the developer continues to run into some supply chain issues. Approximately half of the building will be effectively a brand new structure as the previously structured was demolished and rebuilt from scratch. Both tenants' rent will commence once they take possession of the space. While delayed again, it is expected completion and possession to occur sometime in July of this year. That's what I'm hopeful for. As mentioned previously, it's fairly important to us because upon completion, our NOI will increase by approximately $165,000 per month. In Montreal, we continue to work with the developer on the sale of some excess land at Les Halles d'Anjou. The developer is moving along with their approvals from the city, but is much slower than they originally anticipated. So it looks like now is expected a closing of the transaction towards the end of the year, which will allow us to realize our first payment from the developer. In our recently acquired London portfolio, 2022 should be a solid year for renewals and new leasing. We have approximately 345,000 square feet expiring throughout the year and expect renewals and new deals to create approximately $1 to $2 per square feet and increase rental rates. We're currently finalizing permit drawings for an approximately 100,000 square foot addition to our existing building at 1285 Hooghury that we will build on spec and are also working on another deal with an existing tenant which would expand them by approximately 35,000 square feet Vacancy in London continues to be an all-time low, and the fundamentals in the market remain really strong. On the disposition front, we have two of our suburban Montreal office properties currently under due diligence by a purchaser, one more suburban office, a mixed office retail, and a single-tenant retail property currently in a marketed process, so we expect bids by the end of the month. In addition, our retail mall in Victoria will be launched for sale by the end of the month, and we are also in the process of a portfolio review identifying non-core assets that we may dispose of throughout the year and continue with our evolution of high grading of the portfolio. I'll now hand it over to Rob to give greater detail of the REITs financials.
spk06: Thanks, Kelly. As Kelly mentioned, we've been busy deploying capital raised throughout 2021 and 2022. On November 22nd, we completed $148 million bought deal equity financing part of the proceeds of which were used to acquire the Sobeys Distribution Center on December 9. However, we ended the year with $83 million of cash on the balance sheet available to deploy on acquisitions. We'll see acquisitions completed in the first quarter of 2022 contribute to increasing our FFO and AFFO per unit and decreasing our payout ratio. Q4 FFO and AFFO were impacted by an approximately $100,000 early repayment fee for debt on a retail property which was sold in November. We've revalued our portfolio in the quarter, seeing fair value increases primarily in our industrial portfolio. We also had a small fair value adjustment of our retail properties, where we took COVID-related valuation allowances in 2020, which were partially reversed in the fourth quarter of 2021, as the impact of COVID on our retail tenants has dwindled. Same-store NOI was up approximately $50,000 in the fourth quarter as compared to the third quarter, primarily due to percentage rents, and up $200,000 over Q4 2020, primarily due to steps and rents. As Kelly mentioned, we continue to have a 25,000-square-foot vacancy in a Calgary industrial property. Upon leasing this space, we'll see a boost to NOI. Also, upon the completion of the Richmond, B.C. property repurposing, we'll earn approximately $1.9 million a year of rents and NOI. GMA expense was higher, Q4, as compared to Q3, primarily due to increased staffing costs, including bonus accrual true-ups. I'll now turn the call back to Kelly.
spk07: Thanks, Rob. I'll pass it over to the operator to answer any questions that you might have.
spk02: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Start and 2. We will pause for a moment as callers join the queue. Our first question is from Fred Blondeau with Laurentian Bank Securities. Please go ahead.
spk03: Thank you and good morning. Just on the balance sheet, Rob, how do you feel with the 41% debt to GBV when considering the acquisition pipeline, but also those intensification opportunities that you guys are currently seeing?
spk06: Yeah, so we do have a number of unencumbered properties, and we completed a number of acquisitions in The first quarter of 2022, I think that we'll see the debt to total assets increase a bit, probably upwards of about 45% by the end of the first quarter. And we still have the capacity to do probably, I don't know, but $100 to $150 million of acquisitions in addition to the two properties that we have under PSA to close in 2023. Okay.
spk03: Oh, that's great.
spk07: One of those acquisitions, just keep in mind, the London acquisition is a unit deal.
spk03: Right. Okay. Got it. And then while I got your attention, Rob, your G&E expense was a bit higher than our estimate. What would be, for Q4, what would be a good run rate from here?
spk06: Yeah, so Q4 had some true-ups. I would say that a run rate in around 1.7%. Got it. Yeah. 1.6 would probably be a good number.
spk03: Perfect. And then maybe one for Kelly, just on those intensification opportunities. What are your views on expected yield on costs? I guess especially your views on costs per se. And what would be your expected overall budget for those at this stage?
spk07: Yeah, so the $100,000 spec that we would do is probably about $120 a foot, I think is our preliminary costing. It actually came in a little lower, but I'm just using that number. So I would expect somewhere between a 7% return on that, maybe 7.5% are the expansion that we are looking at with one tenant that would be at a slightly higher return. for there. So those are two right away that we'll look to hopefully commence this year, at least permitting and all the process that goes around it. It's kind of interesting, you know, when I look at the portfolio as a whole, you know, we have housing Clark Road in London where we have 16 acres of land there that it has to go through a little bit of a process with the city, but You could probably build 300,000 square feet there in the future. We've got 22 acres at Titan Business Park in Regina, which is a new one. That's a separate parcel of land that we're looking at doing something because the previous owner had some plans already in the works. So we're kind of assuming those and looking at that to see if we can get a pre-lease done and a build for them, build to suit. So You know, we've got, I'm just trying to see what else, 375 Exeter. We could probably expand that by 100,000 square feet. So, you know, we're working on something there. And we've got some other opportunities where, you know, existing tenants have land and we may purchase that and do a new build for them. So I expect over the next several years to be fairly active on that side of things.
spk03: But two projects in particular in 2022, I guess, would be your focus for now?
spk07: Yeah. And hopefully, I mean, hopefully the supply chain and the delivery of steel doesn't continue to delay things a lot. But, you know, steel is at a premium right now and it's tough to get. So whether it's this year or beginning of next year at some point, it depends on the process.
spk06: Perfect. Thank you.
spk02: Our next question is from Joanne Chen with BMO Capital Markets. Please go ahead.
spk09: Hey, good morning. I guess just on your lease maturities for this year, the $530,000, $580,000, sorry. How much of that is industrial and what sort of renewal spreads are you guys expecting to achieve?
spk06: I'd say the majority of that is industrial, roughly 400,000 square feet is industrial, and I'll let Kelly talk to the upside.
spk07: Yeah, so a lot of it is in London, so call it 350,000 square feet, and I think we'll see anywhere from $1 to $2.50 depending on the space that we have, but keep in mind in some of those if it's On the smaller scale, it'll probably have larger steps in rent, maybe 7% to 10% per year to bring them up to speed. So that's positive leasing for us because I don't think we'll have to spend any money, any TIs or anything like that, or any downtime even. So that's positive. And then to be on... That's the majority of the space. I'd say on the other side, I don't have it in front of me. So, Joanne, I'd have to get back to you and take a look.
spk09: Okay. Well, that's so helpful. I guess, you know, obviously you guys are keeping very busy on the acquisitions front. So I guess you're still kind of focused on the same markets in 2022 as you did in 2021. And I guess what sort of cap rates are are you guys seeing in your target markets now?
spk07: Yeah, so I'd like to say funny enough, but cap rates are driving down right across the board, right across Canada. We'll be active in Edmonton, I think Regina, Winnipeg, Calgary, Montreal, southwestern Ontario. I think those are where our focus is. And, you know, I'm targeting in and around the five caps is sort of where I've been seeing a lot of stuff. We've seen a lot of opportunity in the lower range, in the four caps and low four cap and fours. And we've kind of been a bit selective now. And I'm trying to get those cap rates up a little bit of other things we're targeting or have some pretty decent rental rate increases for growth going forward. So those are the markets we're still targeting. It's a little more challenging now, although I say that we do have a lot of discussions going on with a number of vendors, so it's still pretty active. So I'm still looking at 2022 as a pretty strong acquisition year.
spk09: No, that's great. And you still have the opportunity to source off-market deals as well, right? So that's definitely an advantage.
spk07: Yeah, and we also keep in mind when we're talking liquidity, we do have a portfolio, right, for sale right now. That should free up additional liquidity for us. And we are looking at our existing portfolio and identifying non-core assets where we can, you know, sell those, sell out of them, maybe our earlier assets and redeploy that and continue to high grade the portfolio. So it really is an evolution that we're continuing on this year.
spk09: I guess on that, I guess we should expect this position activity to pick up quite a bit this year, just given that, you know, firmer market for retail and, I guess, office as well, right?
spk07: Yeah, that's a good assumption.
spk09: Okay. And I guess on the cap, one last one for me, on the cap recompression this quarter, which market did you guys experience the strongest compression? Would it be, I guess, the strength of the London market?
spk06: Yeah, so I'd say London, certainly we saw some compression. We saw compression really across Canada. I'd say maybe a quarter point in Western Canada, Calgary, Edmonton, and, you know, quarter to a half in Southwestern Ontario. But we're really seeing it all markets across the board.
spk09: Got it. Yep. This is the asset class to be in, for sure, in industrial. Yeah. Yeah, and congrats on the official name change, by the way. Yeah. Thank you. Okay, that is it. That's been very helpful. That's it for me. I will turn it back. Thanks very much, guys.
spk00: Thank you.
spk02: Our next question is from Mark Rothschild with Canaccord. Please go ahead.
spk01: Thanks, Anne. Good morning, guys. Following all this growth and acquisitions, which has been quite robust, what Maybe you could expand on what are your thoughts are and as far as maintaining this pace of growth, how important is it in the face of lower cap rates and tighter spreads? And to what extent is accretion on acquisitions important, more important going forward?
spk07: I think it's still important. We're striving to get bigger because as you get bigger, obviously, you can get included on some of the indexes, which helps to drive your unit price. If we can continue to grow at a decent clip, eventually you get rated where we could issue our own debt, which puts us in a better competition for assets just from a cost of capital. So Overall, when we're looking now, we're sitting with liquidity and I'm trying to find cap rates in and around the five cap. It's gotten pretty robust competition. Edmonton and Calgary have picked up extremely in the last quarter, I'd say. So the acquisitions we got and the cap rates we got was very opportunistic because I think we got them at cap rates that are are gone from those markets. So we do have a bunch of off-market deals that we're trying to work on right now that would be nice cap rates. And I'm always trying to blend the two, right? So when I talk about fourth quarter, the blended cap rate, some were lower, some were higher. And so my overall target and what we've been able to do is over that five cap. So that's what we're still continuing to do because that's still fairly accretive for us going forward.
spk01: Okay, great, thanks.
spk07: That's all for me.
spk02: Thanks, Mark. Our next question is from Brad Sturges with Raymond James. Please go ahead.
spk05: Hi there. Just to focus on your comments on the disposition side, obviously you've got a process going for certain assets that you've talked about for a couple of quarters. Where would that put you in terms of timing of transactions? Would that be more Q2, Q3 for the majority of contemplating near-term transactions on the sell side right now?
spk07: On the sale side. So the stuff that we're, so there's a couple that are under due diligence that if everything goes fine, that would probably be, what is it, March, you know, end of April. And then the others we're expecting, to be out in the market and get big back end of the month after March break when everyone's back. So those would probably be looking at, you know, beginning of May for those type of ones. And then the big one, Victoriaville, that's the big one, which quite frankly, we were working on a big deal there and that's why it's taking a little bit longer because that's created value in that property. And then once we're complete on that and have it papered, will go to market and that that's larger. And so that would probably be, you know, June type of closing on that asset, I would think so. That's kind of what we have scheduled right now.
spk05: And, and I guess that the guidance had been previously about $100 million this year, in that near term pipeline, is that still the case in terms of expected proceeds?
spk07: Yeah, on the near-term pipeline, yes. We are banding around a few others that we're internally discussing. So, you know, the second half of the year, that can continue on. But we haven't finalized anything there yet.
spk05: Just on that, I guess within your commentary, you talked about looking at other non-core asset opportunities. It seemed to imply that that was perhaps, you know, some industrial – you know, just talk about, uh, whether or not that's the case and, and how do you see maybe some capital rotation out of, uh, uh, certain assets within the industrial side to, uh, to, to help, uh, rotate into, I guess, higher quality or higher growth opportunities on, uh, that you're seeing in your acquisition pipeline.
spk07: Yeah, for sure. So let me preface it by, we've absorbed a huge amount of square footage. And so we're, uh, internally absorbing that and getting it all set up. And then now we're marketing and selling another batch. So that takes time. So now we're looking at, you know, second half of the year, what do we have coming up? So we may, there'll probably be another office asset or maybe two that we will look at in later in the year. And then some non-core assets, sites that we have that were earlier transactions in our life cycle back from, you know, 2014 and 15 that are in more remote markets where we can recycle out of that capital and put it back into the Edmonton, Calgary, Montreal, you know, southwestern Ontario where we're seeing opportunities. So I think you'll see a little bit of that second half of the year.
spk05: Okay. That's great. I'll turn it back.
spk02: Thanks, guys. Our next question is from Kyle Stanley with Desjardins. Please go ahead.
spk04: Thanks. Morning, guys. Morning. Just sticking on the previous line of questioning, I'm just wondering, as you look to potentially exit some of those non-core assets and your legacy assets in tertiary markets, have you seen similar levels of cap rate compression from those assets as you maybe have in, call it, Edmonton or Calgary?
spk07: No, I'd say right now, no, they're lagging behind. So we really haven't touched those from a valuation standpoint in our NAP. So although, and I say this loosely, the way things are going out there, it's possible. So as we head into the second half of the year and if oil and gas continues to accelerate the way it is, it definitely could be a possibility. We're definitely looking at some of those tertiary markets in Alberta.
spk04: Okay, that makes sense. Just looking at the Savage Road complex for a second, more of a modeling question, I guess, but So would you expect the same level of income support now over the next, you know, first quarter and second quarter before anticipated completion and delivery in July?
spk06: So the income support is on the first phase, the roughly 110,000 square foot where we have the rock climbing, the swim school and the soccer school. I think that will be turned over with daycare coming on and others. I think that'll be turned over what Kelly and,
spk07: Yeah, it should be relatively soon. I know the daycare is a big chunk of space there and they are just waiting for their occupancy permit. Just the nature of their business, they have to have all things I's dotted and T's crossed. So that will be turned over there. But that to us is effectively, it doesn't affect our NOI, right?
spk06: Well, it affects the geography of our NOI. So I guess to answer your question on that, On that 110,000 square feet, it's about $3.1 million between NOI and vendor rent support. And until that's complete, we'd expect similar levels of vendor rent support, and we'd expect to be getting $3.1 million a year out of that building, either by way of vendor rent support or NOI directly.
spk04: Okay, fair enough. and then just last one sticking with the savage road property um just wondering if if there's any updates on the uh 70 000 square foot expansion and then just thinking back i think you know in the past you've mentioned you know the potential for a further intensification of the site maybe looking at stacked industrial but just kind of wondering if uh you know have your plans changed there at all or what are you thinking about longer term for that asset yeah so for me
spk07: Um, there's 70, it's actually about 74,000. I think we'll still go. Um, I'm holding off a little bit because I'm reluctant to start it right away. Uh, while I'm ongoing on the other side, I want to get closer to the possession of, uh, those two, two vacancies that we have. Um, so as we get closer to that, I'll make a decision to go forward. So that is still in our plans to go forward. I think once we complete that, we will look to probably stop and make a decision on the asset because when I look at the asset as a whole, it gives us a good opportunity. We have very little debt on it to perhaps in the future roll out of that asset and then redeploy those proceeds right back into industrial assets. But that's a decision that would be down the line once we start and get closer to finishing on the addition. Okay. We'll have realized significant value at that point as well. So that's when I'll make the decision there.
spk04: Okay. Thanks, guys. I'll turn it back.
spk07: No problem.
spk02: Our next question is from Matt Cornock with National Bank Financial. Please go ahead.
spk08: Good morning, guys. On the disposition side with regards to the non-core assets, there's no leasing pressure or near-term maturities at those assets. They're good cash-flowing properties. It's just a question of the geographies they're in. Is that fair?
spk07: I would say most of them, yeah, are full assets. Actually, they're all full right now.
spk06: I'd say aside from a smaller $10 million to $15 million office property in New Brunswick, I'd say that that's the case. They're well-tenanted.
spk08: Yeah. Okay. I'm thinking more on the industrial side. Those properties, the higher cap rate would be potentially a function of just where they're located, not necessarily the tenants or the length of the lease term. Okay. Fair enough.
spk07: Yeah, they're a remote location.
spk08: And then on your disclosure with regards to the London lease step-ups on renewals or new leasing, can you give a sense as to what that is on a percentage basis? And Kelly, did I hear you correctly that you're not taking it all sort of in the initial step, but you're going to spread it out through higher sort of annual rent steps throughout the course of the lease as well?
spk07: Yeah, so when we look at the portfolio, there's instances where we might see $2, $2.25, maybe $2.50 a foot. There are others that have a little bit more in the industrial space, but a little bit more office-laden, so not as valuable space. So that might be in the lower range of the increases, but as it is, the market as a whole is very, very tight. So the leasing is very strong. So what what we're looking at probably is a smaller increase because I'm balancing out, you know, no downtime, no TI, no money spent. So maybe on the first year we take a slightly smaller lift and we get, I don't know, maybe 10% increases per year for the next four or five years. So balancing it out to get us to the rate that we want probably by year two or three.
spk06: I think as a percentage of expiring, we're probably looking at 30% to 40%. It's a bit of a challenging number to calculate quickly just because we're converting some gross leases to net leases. 30% to 40% of expiring rents, Kelly, would that be?
spk07: Yeah, yeah.
spk08: And I guess taking it a bit further for London and maybe across the portfolio, is that your general view as to where the mark-to-market opportunity is for those locations, and then also maybe if you could kind of speak to the trajectory of market rents, because presumably those are increasing at a pretty steady pace as well.
spk07: Yeah, London's increasing significantly. Like I said, there is zero vacancy right now. So that's where we see our growth in the portfolio range. in the next couple of years because then there's some more that expire in 2023. So, you know, overall in that portfolio, we're pretty well under market rent. Now, the entire portfolio across the board, I'm kind of reluctant to comment because things are changing rapidly in Calgary and it's happening quarter over quarter. So I think it's just a little bit premature to call it because it is changing really fast, really fast.
spk08: And I'm not sure how your portfolio would have done last year there, but is the thought, I mean, it seems like occupancies are improving and rents, I mean, they were maybe down slightly for some of your peers, but the view is that that's going to get back to flatten and start increasing in the near term. Is that a fair characterization?
spk07: Yeah, I think that's fair. So that's what we're seeing as well. And then Regina, we're in Regina, and I expect good things from Regina. There's going to be a mass, I call it mass from Regina, but strong population growth there, strong industrial growth there, I think, from just the industries that are moving in. So that's going to be a fairly strong market going forward over the next several years, I think.
spk08: Okay, perfect. I appreciate it. Congrats on the quarter, and thanks for those weighted average interest rates over the debt maturity profile.
spk07: Thanks a lot, Max.
spk08: Thank you.
spk02: This concludes the question and answer session. I would like to turn the conference back over to Mr. Hansik for any closing remarks.
spk07: No, I just want to say thanks, everybody, for joining us, and then we'll hopefully have some really positive news next quarter and continue on. Thank you.
spk02: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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