Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT first quarter 2022 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 0. I would now like to turn the conference over to Mr. Kelly Hansik, Chief Executive Officer. Please go ahead, sir.

Great. Thanks. I'd like to welcome everyone to the 2022 First Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Robert Chase, 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 CDAR.com, for cautions regarding forward-looking information for information about non-GAAP measures. So as we look forward to the balance of 2022, we continue to be focused on growing our platform, the continued high grading of our portfolio, and executing on a capital recycling program as we move out of some office retail assets as well as some non-core industrial assets. In the first quarter, we have closed on an additional nine high-quality industrial buildings totaling 236.5 million square feet at a blended cap rate of 5.12%. In addition, we are under contract for four additional properties, a brand new build, strong covenant distribution center in Ottawa to be completed in January of 2023. One in London, which is in the process of having 150,000 square foot new addition being built and expected to be completed by mid 2023. And approximately 85,000 square foot building new build to be built in Balzac, Alberta. with one of the REIT's existing tenants, which is expected to be completed in the late fall of 2023. The REIT is also in due diligence on a 94,000 square foot strong tenant and industrial facility in Quebec City. There's several additional assets that we're in varying stages of discussions on that we hope to come to fruition over the next several months. As you can see, we have an active pipeline of deal flow, and with our current liquidity and available funds from our capital recycling program, we'll be able to execute on a significant amount of additional industrial acquisitions throughout the balance of 2022. We have 22 acres of excess land at the Titan Industrial Site in Regina, one that we recently closed on, that was acquired in February 2022. We also have the option to transact on 10 additional acres of land at the Acropolis Warehouse facility located on the Edmonton Airport grounds. We have engaged an architect and are having renderings created for these parcels of excess lands. So we plan on presenting these renderings to some existing tenants to find one that we can complete a build to suit. One of the REIT's existing tenants in Edmonton has expressed a possible level of interest in both of the sites. We're also in the process of submitting to the City of London on a 100,000 square foot spec addition at our property at 1285 Hubrie and a 33,000 square foot expansion for one of our existing tenants at 5 Cuddy in London. We're also exploring a development program with RFA Capital where the REIT would participate in the development, which would provide a pipeline of high quality distribution facilities in the future. In Richmond, BC, we continue with the redevelopment of our 60,000 square foot building for two tenants. Both tenants' rent will commence once they take possession of the space. It's still expected completion and possession to occur sometime in July of this year. As mentioned previously, upon completion, our NOI will increase by approximately $165,000 a month. We also are planning the 74,000 square foot addition, which would provide a significant lift to the REITS NAV. We'll also be applying at the same time for bonus density, which, if approved, would allow for additional square foot to be built in the future. In Montreal, we continue to work with a developer on the sale of some excess land at Les Halles d'Anjou. The developer is still moving along nicely with their approvals from the city, and it is still anticipated 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 is a solid year for renewals and new leasing. We'll see huge growth there. We have approximately 345,000 square feet expiring throughout the year, and it looks like we're averaging an overall 30% increase in rental rates. with significant yearly increases. The portfolio also has a similar renewal square foot profile in 2023, which we are expecting to renew at approximately, I'd say, 50% to 75% premium to the existing rates. Vacancy in London continues to be an all-time low and the fundamentals remain really strong. On the disposition front, we still have our three suburban Montreal office properties currently being marketed. A mixed-use office retail and a single-tenant retail property are about to go under a purchase and sale agreement. In addition, our retail mall in Victoriaville will be launched for sale once we have completed a lease extension and expansion with one of our largest tenants, which is expected to be in our hands shortly. We're also in the process of dealing with a non-solicited offer for a portfolio of non-core assets that would allow us to recycle this capital in the future. I'm also pleased to announce As part of their semiannual review announced last evening, Nexus Industrial REIT has been added to the MSCI Small Cap Index, which changes will take effect on May 31st. So very positive for us. Now I'm going to hand it over to Rob Chaison to give greater detail of the REIT's financials.

Thanks, Kelly. In November 2021, we issued approximately 13.4 million units, primarily in respect of a bought deal equity offerings. Roughly half those units were included in our weighted average units outstanding for Q4, and they were fully included in Q1 2022. We started Q1 2022 with $82.3 million of cash on our balance sheet, which was deployed as partial purchase price consideration in the completion of $236.4 million of acquisitions. At the end of Q1, we had $150 million of recently acquired properties that were unlevered, representing capital to deploy for future acquisitions. Acquisitions completed in Q1 2022 generated approximately $1.6 million of cash NOI and are expected to generate approximately $1.5 million of additional cash NOI in Q2 2022. The timing of our RSU grant with one-third vesting in the quarter increased G&A expense for Q1 2022. G&A expense related to RSUs will be approximately $500,000 lower in Q2 2022. In connection with the acquisitions completed in the first quarter, we entered into mortgages totaling approximately $130 million, including three mortgages with an aggregate value of $109 million, which were financed for terms of 7 and 10 years at rates of 3.18% and 3.28%. Our same-store NOI for the quarter was impacted by vacancies at our office property in New Brunswick, where the impact of the pandemic had 25,000 square feet come back to us last April and a further 13,000 square feet come back to us at the end of November. We also had a 22,000 square foot industrial space that was vacated on November 1st. There are currently discussions with three potential tenants for this space. Acquisitions completed over the course of the last year were the primary contributors of approximately $800,000 of straight line rent in the quarter. Properties acquired have embedded steps in rent. As Kelly mentioned, we expect to see some significant lift in new leases and lease renewals in the second half of the year, particularly in London, Ontario, which will bolster our same store NOI. A 100,000 square foot addition at the Ajax property that we co-own was completed at the beginning of the quarter. This brought online approximately $100,000 of quarterly NOI. The redevelopment of a 60,000 square foot space at our Richmond, BC property is expected to be completed in the second half of the year, and we'll see approximately $165,000 a month of incremental NOI. For the remainder of 2022, we have approximately $4.5 million of mortgages at a weighted average 3.17 interest rate that will mature. In 2023, we'll have approximately $49 million of mortgages with a weighted average interest rate of 4.26% that will mature. So we're not significantly exposed to the recent rising interest rate environment. I'll now turn it back to Kelly.

Thanks, Rob. We'll open up the line for any questions that you may have.

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 are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue.

The first question comes from Brad Sturgis of Raymond James.

Please go ahead.

Hey, guys. I'm going to apologize in advance. I was trying to keep up with some of the initiatives you're working on and trying to keep pace with that. You've got a lot going on. I guess I just want to start with on the intensification of the excess land and the expansion opportunities, can you just walk through some of the opportunities again on Edmonton, Regina, the size and scope of the projects potentially and what type of returns you could get there?

Um, yeah, I'm not a hundred percent sure yet. So Regina has 22 acres of land and we're in the process of getting, uh, we've got an architect drafting, um, for that and possibly in Edmonton. So on the 10 acres. So I'm not sure the size and scale yet, um, in Regina has separate, it's a separate parcel. Um, So we have the choice of we could do one facility or we could do three the way it's laid out. So I don't know on the square footage yet, and we haven't gone on pricing. But I would imagine it would be somewhere with costs where they are probably in the 6% to 7% yield, I would say, or maybe closer to 7%.

Okay, so it's still too early. Yeah. to provide guidance on that yet. Okay.

Yeah, and London's a little different. So London, where we actually are in the process of going to the city with 100,000 square feet of spec, and I would think somewhere around a 7% development yield we can get on that one. And then our 33,000 square foot expansion, that's pretty far down the line as well, and we know that's going to be somewhere between around a 10% yield.

At this time, would more of this pipeline be starting construction maybe 2023 at this point?

Yeah, once we get approval, right, then we would have to order the steel and whatever, and the steel is still apparently quite a lead time.

Yeah, understood on that front. Can you just touch on a little bit more to the extent you can on the unsolicited offer for some of the non-core assets? I assume that's more on some of the, I guess, the industrial assets that you identified last call that could be potential for capital recycling, but could you just touch on that a bit more?

Yeah. It's fairly significant, and it's I wanted to mention it because it is something we're looking at doing. So, and it's a fairly, we do have an offer in our hands. We haven't press released it. So I'm not going to say the size and scale, but it would be what we would call our non-core distribution, you know, our core assets now are distribution centers and things like that. So it would have been earlier assets that we picked up. And there's, still a fair bit of negotiation back and forth that has to be done. So I'm hoping to have more information relatively soon, which at that point we would issue a press release.

Yeah. Okay. Makes sense. Just last question before I turn it back. Just on the asset sale side for the, I guess the 55 million listed for sale, does the changing or evolving industry environment, has that

impact of potential pricing at all there are you still pretty comfortable in terms of achieving uh your expectations for pricing there yeah it's gonna it it's uh i would say it is affecting it i think things are changing slightly we did have two of them under contract that have dropped off um with someone and um so we've remarketed them and we have significant interest in them um it whether we get what we want. So that's what it's, it's going to be close. I think, um, uh, to our ask is my best guess, but, um, there is still significant interest. And I think the big one that we'll have garnered the most will be the, uh, the mall in Victoriaville because that, um, has very strong tenant base with, uh, good term and, um, you know, service oriented the entire Dollarama, uh, Metro. So very, very well tenanted. And so there's pretty good demand for that type of product. So I think that one will garner a huge amount of interest. And I think that pricing on that will still be pretty good. Okay.

That's great. I'll turn it back. Thanks. The next question comes from Kyle Stanley from Desjardins.

Please go ahead.

Thanks. Morning, guys. Hey, good morning. Morning. Um, just one question with regards to the, uh, you know, the, the mark to market and the leasing spreads you're seeing. I mean, it, it sounds, um, like the, the rent growth opportunity in London, uh, and your, your Montreal industrial portfolio is very strong. If you had to today, you know, where would you peg the mark to market portfolio wide?

So we're in the process on that. We don't have it done. We'll hopefully, uh, we're going to have it out there for next quarter. Um, on the industrial, it gets mixed up with some of the retail and we do have a large number of retail tenants right now still. So, you know, the London, you know, that's the big one, right? And Montreal too, but we just don't have as much expiry in the short term in Montreal, but I know that stuff that we have done. So we've done, I think, a new lease with kind of 15,000 square feet where I think we achieved, you know, $12 rents where the exiting rent was six. And one of the tenants who took it is our existing tenant. He's expanded. So he's done an early renewal and he wanted to secure the rate. So I think he's locked in at 12 and was expiring at around six as well. So in the Montreal of things that we do have coming up or expiring, we'll see 50% to 100% increase in rent from where we are. In London, we're pretty close on all these deals here, so it looks to be a blended overall like about a 30%, but then with some significant yearly increases as we get guys right up to market. Then next year, when I look at that profile expiring there, so it's over 300,000 square feet again, And I think that one's more towards a 50% to 75% premium to the existing rates because some of them are pretty low compared to market. So those are our big expiries coming up and those are the ones that are our big drivers of growth.

Okay, makes sense. Thanks for that. Just moving to, I guess, the acquisition side of the business, your commentary suggests, you know, the pipeline remains very strong. It sounds like you've got some more deals under contract that are new. You know, in the context of the rising rate environment, do you expect that to impact volumes, you know, acquisition volumes this year? And, you know, are there any larger portfolios out there that maybe you could take a run at or is it really going to be kind of one off, two off type transactions?

Well, let me put it in context. So I think the cap rate environment has changed things a little bit. I've seen things on some of the pricing. Maybe it's 50 beeps on a cap rate here and there where guys were looking for four. Now they're at four and a half or whatever. But the things that we're looking at here or that we have are, I'd say – So some of them we had already done their future PSAs but newer deals are in the fives and we are looking at something, believe it or not, in a seven. So we're kind of targeting in that five cap range now. That's overall product that we're trying to secure unless they have some significant rent growth opportunity in it. There are some big portfolios. There are some out there right now. There's some three, $400 million portfolios that are floating around. And I would say the odds of us going after one is slim right now, just considering our cost of capital and the size of them. So now in saying that, if we're lucky in recycling the capital that we think we could, So it's kind of a moving puzzle right now to put all the pieces together. But we're kind of doing it as some deals come to fruition. And if we're successful on recycling the capital, that puts us in a fairly liquid position. So it's really going to depend.

Okay. Okay. And just last one for me, looking at Richmond, you mentioned applying for maybe some additional development space. Are you able to provide any details there?

Yeah, sure. So we are going to go in and redo for a permit for the 74,000 square foot addition. I'd put it on hold for now, but I think we will go because I think the amount of lift that we can get from that project is huge. So getting the bonus density and going for it now, whether we build it or whether we just have that value attached to the project, it's extremely valuable. So as you know, Richmond has no land. Land is $8 to $10 million an acre. So to be able to have that density to whether we stayed in the project or we moved on or where we kept going because I don't see that many opportunities that you can get that type of lift just from the demand for product there. So cap rate's really low, rental rate's really high. It's a good combination for us, but that would be down the line. Getting the bonus density and having that would just be extremely valuable.

Okay, great. That's it from me. I'll turn it back.

Thanks.

The next question comes from Gurav Mathur from IA Capital Markets. Please go ahead.

Thank you, and good morning, everyone.

Morning.

So I have two quick questions and I'll begin with the first one. Now we've seen, you know, the Amazon jitters persist among equity market investors. Just from your viewpoint, how do you think investors should think about the Amazon narrative and focusing on, you know, markets such as London and some of the industrial markets that you're targeting in your acquisition pipeline?

Listen, the London, our London portfolio, I'm extremely high on. The demand is, through the roof right now and there's no supply. So there's not much coming on either. So we're hugely positive on southwestern Ontario. We mentioned some development opportunities with RFA Capital. We're in Hamilton area, which I think is another future node right by the airport that's going to be hugely successful for us. Edmonton and Calgary, you're starting to see rental rate traction in growth there. So that we were in there before was great. Amazon, I think maybe they had, with COVID and the amount of demand online, I think them slowing down, I don't think is a huge deal, to be honest. They're still building 3 million square feet in London, and that's a huge project. And so I think slowing down still means they're still absorbed taking on a huge amount of space. And when you look at the market as a whole, right, I think where we're situated, you know, if we're going to go into Hamilton, if we're in southwestern Ontario, these moves by Amazon into London can only benefit the existing guys that we have, right? So I'm hugely positive on the markets we're in.

Okay, great. I think that's in line with what we're thinking here as well. Last question, and I'm just going to come back to the acquisition pipeline again. You mentioned you're looking at going in cap rate, which is at a five cap, and at max at a seven cap. Just out of curiosity, what would that mean on a stabilized basis?

Yeah, so when we're looking at... Some of these, let me just think. So one of them we have, it's in the five caps, and I believe it has 2.5%, 3% increases. The one that would be the higher cap rate one is, I think, one that would... It's at that cap rate, but it would be a bit of a new market for us. And it also has... some vacancy that could come up in two, three years that I think we could turn and get a higher rate on that. The other two new builds are kind of more stabilized assets. I mean, our London one, we know we have it at a six cap with 150,000 square foot new addition. So that'll be at a six, but it has also the ability to build another 150,000 square feet on it. So We've just been a little bit more picky, I guess, on assets we're chasing. I think we've seen it across the board in the acquisition. Some guys have dropped out where maybe they're smaller investors. They're taking a breather and dropping out and we're not chasing four and a quarter caps anymore. It's pretty tough to make that accretive. So we're just looking at different opportunities in leveraging the relationships that we have.

That's great. Thank you for the call on that, Kelly.

I'll turn it back to the operator. The next question comes from Matt Cornack from National Bank Financial.

Please go ahead.

Okay, guys. I just wanted to quickly follow up on that line of thought with regards to cap rate expansion. I mean, for a market like London where it seems like rent growth expectations have been outstripping inflation and expectations generally, are you still seeing guys willing to bid aggressively? I mean, you saw some pretty dramatic cap rate compression in that market, but is it markets where you're not expecting to get the same level of rent growth that are seeing the expansion, or is it across the board?

I'd say London is still a pretty active market. If anything, maybe some smaller guys have dropped out, but there's still a lot chasing. But there isn't a lot of product for sale right now there, so it's kind of stable. I think where I saw some of the cap rate, it's maybe in the Edmonton area or Calgary And it's minor. Like you got to understand Edmonton went from, it went from sleepy where no one wanted to be in it to where all of a sudden a bunch of guys came in because of the cap rate, different differentiation between there and Ontario, for example. So we saw new faces in there bidding against us and it started to push things up. So I think it's just kind of leveled off there a little bit. And yeah, Um, so I'd say in Western Canada where rents aren't growing as rapidly, but they're, they're starting to grow. And I think it's, it actually looks like they're getting significant traction now. So, um, I just feel that the market there was, you know, everyone was pushing four caps and, you know, that was, it was still Edmonton and the growth isn't, wasn't as robust as Ontario. So, I think it's just come off, you know, for the brand new high quality assets, come off a little bit there. And when I say come off, when you look at those quarter over quarter CBRE reports or whatever, I always feel they're lagging a quarter or two. So it'll all come out in the next, I guess, several quarters. But I think the expectation of someone was out with a four and a capital for a quarter cap portfolio, they're now thinking maybe it's 4.5, 4.6. So it has affected it there. I don't think it's affected it in Ontario at all.

Fair enough. No, that absolutely makes sense. Now, on the flip side, does that present maybe an opportunity to re-engage in those markets or look back at them? Because I don't know what your thoughts are, but looking just at the occupancy trend in both Edmonton and Calgary, it seems like we may have an Ontario-type rent growth situation there a few years out from now if that continues. But yeah, just thoughts on that market generally.

Yeah, 100%. And we were one of the first guys in there when everybody was getting out. So I think it will be beneficial for us, especially on a lot of the assets that we just closed on. So we have a fairly strong network there, so we're seeing a lot of assets there. And I think we'll still be highly active because I think you will start to see the rent growth occur there a little. I don't think you're going to get Ontario-like rent growth, but you're going to get pretty significant rent growth, is my guess.

Okay, fair enough. And then just your commentary around London and the near-term maturities, that looks like it's a little bit over half or around half of your maturing space. Is the rest of that a mix of retail and industrial, or is it more retail heavy? Just trying to gauge what spread would be and what impact that would have. I think Kyle addressed it, but any further color you can provide there would be helpful.

Yeah, I'm trying to think of the main portfolio. It's about 1.2 million square feet. call it half of it is expiring in this year and next year. In the rest, and I'm looking, there's some longer term deals, you know, 2028, nothing too huge in 2024. So the next two years, I think, are the big turn that we have. and the rest of it is longer term, but it's all industrial.

Okay, fair enough. I'm just thinking relative to your total lease maturity profile over the next two years, it seemed like London was around half of the amount of space maturing, but is the remainder industrial space outside of London or is it retail and office assets that are coming to maturity?

I would say it's a mixture of retail, office, but the majority is on the industrial side. Okay.

Fair enough. That's great. I appreciate the color and congrats on the quarter. Okay. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Hanswick for any closing remarks.

I want to thank everybody.

for attending and we'll talk to you next quarter thank you this concludes today's conference call you may disconnect your lines thank you for participating and have a pleasant day