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spk01: Thank you for standing by. This is the conference operator. Welcome to the NEXUS Industrial REIT second 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'll 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.
spk08: Thank you. I'd like to welcome everyone to the 2022 Second Quarter Results Conference Call for Nexus Industrial REIT. Joining me today is Robert Chaston, 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. There was another solid quarter in the book. As mentioned in the previous quarter, we look forward to the balance of 2022 and 2023, where we will begin to see significant rental rate growth in the portfolio, especially in our Southwestern Ontario portfolio. In the second quarter, we closed on an 80% interest in development land with RFA Capital Partners in Hamilton, Ontario, where we plan to build a 250,000 square foot industrial building with completion in late 2024. This is our second parcel of land in Hamilton with RFA for future development. And subsequent to the quarter, we have closed on a third development parcel. In Southwestern Ontario, our London portfolio is not only primed for significant rental rate growth, but also has the ability to add additional square footage to our existing facilities. We have submitted for permit for the construction of 100,000 square foot addition to our building at 1285 Hoover Road, which we hope to break ground early next year. In addition, we currently are negotiating with existing tenants in the portfolio for another approximately 100,000 to 125,000 square feet of expansion to their existing premises. And the REIT has 22 acres of excess land in the Titan Industrial Site in Regina, Saskatchewan. That was acquired in February 2022. And we have completed a design-build package, and we are actively marketing to build approximately 300,000 square feet built to suit. We also have the option to transact on 10 additional acres of additional land at the Acropolis warehouse facility located on the Edmonton airport grounds. As mentioned last quarter, we are under contract for three additional properties, a brand new strong covenant distribution center in Ottawa to be completed in January, 2023. One in London, which is a unit deal, which is in the process of having 150,000 square foot new addition being built and expected to be completed mid 2023. This is an extremely valuable site as there is significant additional land to continue to expand the facility as the TEN continues to grow. And then thirdly, an approximately 85,000 square foot cross dock facility to be built in Balzac, Alberta with one of the REIT's existing tenants, which is expected to be completed in late 2023. Subsequent to the quarter end, we closed on a 94,000 square foot strong tenanted A-class industrial facility in Quebec City. where we assume debt at the rate of 3.63%. We have also waived conditions on a 75,000-square-foot industrial facility in Montreal, where we will see annual rental rate increases of approximately 3.5%. We're also in due diligence on a four-building, approximately 450,000-square-foot industrial portfolio in southwestern Ontario for approximately $37 million, which is at a very attractive cap rate and a price per square foot. that we believe will provide considerable value to the league. As you can see, we have an active pipeline of deal flow, but we will slow this process after these transactions and focus on developing the aforementioned sites and higher returns within our existing portfolio. In Richmond, BC, we continue with the redevelopment of approximately 60,000 square foot building for two tenants. It is now expected that completion and possession to occur in mid-September as the final setup of their spaces is nearing. This will be a world-class facility upon completion. We're also planning a 74,000-square-foot addition, which would provide significant lift to the reef nav. We're also applying for bonus density, which, if approved, would allow for approximately 450,000 square foot of additional usable square feet to be built in the future, providing additional value to the site. Montreal, we continue to work with our developer on the sale of the excess land at Mayal d'Anjou. The developer is still moving along with approvals from the city. It is expected now that our first payment from them will be in February 2023. On the disposition front, we have sold a retail property located in Chateau Gay, Quebec for $8.3 million, and a purchaser has waived conditions on a mixed-use property in Longay, Quebec. Post-sales and post-closing of our industrial acquisitions, the REAP's holdings will increase to approximately 87% of NOI derived from the industrial sector. Our three-building office portfolio will be relaunched in the fall when it is anticipated that interest rates stabilize and the acquisition market begins to open up. In addition, our retail mall in Victoriaville, Quebec, will be launched for sale in the fall, now that we have completed a lease extension and expansion with our largest tenants. We also continue to negotiate a deal with a non-solicited offer for a portfolio of non-core assets that would allow us to recycle this capital in the future. I will now hand it over to Rob Chason to give greater detail of the REIT's financials.
spk05: Thanks, Kelly. As Kelly mentioned, we put some more of our capital to work on July 11th when we acquired a $19 million property in Quebec, and we have a firm deal on another $18 million acquisition in and another $37 million deal under diligence. The acquisitions completed in Q1 contributed to the REIT's results for a full quarter in Q2, and we saw our AFFO payout ratio come down from 96.7% in Q1 to 90.3% in Q2. Absent the impact of a $460,000 unrealized foreign exchange loss in the quarter, the payout ratio would have been 87.4%. The unrealized FX loss negatively impacted per unit measures by 0.6 cents. We have approximately $150 million of recently acquired properties that are unlevered and will begin to borrow against these properties in the third quarter to close the properties we have under contract. As anticipated, acquisitions completed mid Q1 generated an additional $1.5 million of NOI in Q2 as compared to Q1, partially offset by higher associated interest expense. Our Q2 G&A was approximately $500,000 lower than Q1, primarily due to the timing of RSU expenses driven by vesting. Q3 will see the positive impact of rental rate growth recorded in our Q2 MD&A, as well as leasing deals concluded subsequent to quarter end. All of this contributed to an increase in normalized FFO per unit from $0.19 for Q1 to $0.20 for Q2, $0.21 excluding the unrealized foreign exchange loss in the quarters. AFFO per unit increased from $0.165 for Q1 to $0.177 for Q2, and it would have been $0.183, excluding the unrealized foreign exchange loss in the quarter. For the remainder of 2022, we have approximately $20 million of mortgages at a weighted average interest rate of 3.55% that will mature. In 2023, we'll have approximately $50 million of mortgages with a weighted average interest rate of 4.26% that will mature. Bond yields have come back recently, almost 100 basis points off the recent highs. I'll now turn the call back to Kelly.
spk08: All right. Thanks, Rob. We will open up the line to any questions that you may have.
spk01: 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 two. We will pause for a moment as callers join the queue. Our first question comes from Brad Sturgis of Raymond James. Please go ahead.
spk06: Good morning. Hey, good morning. I appreciate the additional disclosures on the leasing front there. Just on the 191,000 square feet, you're kind of in advanced negotiations in terms of renewal. Can you give us a sense of what you're expecting from a rent spread perspective?
spk08: Yeah, I think, let me just look here. Trying to just see what's included in that. We have 150,690. I'd say overall on there, you're probably around 100% spread. I'm trying to figure what's in the 191.
spk06: The 191 that's mainly in London, is that correct?
spk08: Yeah, the majority of it. When I look at the balance, so in April of next year, we have 35,000 square feet. where we'll probably see approximately $8 a foot, $7 or $8 a foot lift on that. We have another one comes the end of January of next year, about 115,000 square feet, where we'll probably see about 450 a foot on that. And then we had 44,000 square feet come up in... Start with July of this year where we saw, I think it's $2 and change on that $44,000. And then another one that comes up and starts in November where we see about a $1.20 lift on that.
spk06: Okay. And then just more from a modeling perspective, but how would you think about the non-industrial
spk08: expiries coming up or would it be kind of more uh stable rent on renewal or how should we think about the spread there yeah so when i'm looking at the next 12 months on the retail portfolio um from a larger scale here um we're probably faring fairly well to be honest so um it'll be kind of i'd say slight growth not not extreme maybe one or two percent uh on the retail portfolio And when I go down to look at the office side of things, I think that would be probably stable or, yeah, right around stable. No real growth there.
spk06: Okay. Just turning to... the asset sales side, obviously starting to complete some transactions there. How is pricing still turning relative to your book value and where your expectations were maybe at the start of the process of valuations so far held into your expectation?
spk08: Yeah, so with the two that we did sell, I would say we're just slightly below book value. We pulled the the three building portfolio because when we're marketing it, interest rates were driving up significantly, which put everybody seemed to have a pen down. So we pulled it and we're holding it to the fall because I think now that interest rates have stabilized, they'll generate a greater amount of interest. So that's what we kind of have planned for Victoriaville and the three office assets. It's hard to tell right now because the institutional side of buyers and that have gone down for a while just until interest rates stabilize. So I think hopefully, you know, September, October, November, that will turn around once things are clearer in the market.
spk06: You're working through the process on the Western Canadian industrial potential bid there. I mean... Where are you in that process? Can you give any thoughts in terms of a potential transaction at this point?
spk08: It's a little bit early, but what I can say, we've been back and forth a few times and we've put our final kind of terms to paper and they're in the process to see if that works for them and their financing. I'm cautiously optimistic that we'll have a deal, but you never know.
spk06: Okay. I'll turn it back. Thanks a lot. Okay. Thanks.
spk01: Our next question comes from Kyle Stanley of Desjardins. Please go ahead. Thanks.
spk05: Morning, guys. Morning.
spk04: Would you be able to just talk about the contractual escalators you're getting on new leases across the portfolio and, you know, just generally maybe where you see the average escalation currently?
spk08: Yeah. So, you know, we have our CPI increases out west. And when I look at what we've done and what we're doing in southwestern Ontario right now, I'd say there's significant contractual increases For example, we did do one, I believe, at $750,000 that then goes to $825,000, $975,000, something along those lines. So in southwestern Ontario, they're kind of averaging I'd say 7% to 10% on the renewals that we've recently done.
spk04: Okay, perfect. Maybe just Switching over to your view of the acquisition market currently. I mean, it sounds like obviously you've got a portfolio under diligence. You know, are you seeing the same volume of off market deals that you have in the past? And then, you know, how are you thinking about capital allocation here? You did mention slowing down a little bit once maybe you can finalize this portfolio in Southwestern Ontario and moving over to
spk08: development but maybe just a bit more information there on that portfolio in southwestern ontario is that from your existing vendor or is this a new relationship yeah so um let me say we had the quebec city one under contract before so we closed on it it's a solid asset um great addition to the portfolio the one that we have waived due diligence on um sale lease back uh nice property again in montreal area with 3.5% negotiated rental rate increases. So I think for a same store, it's good on the rental rate increases. And then the Southwestern Ontario kind of fell in our lap. And the cap rate is just extremely attractive. And so it's nicely accretive for us. It's well on a price per square foot. It's very cheap. And from an in-place rental rate standpoint, it's well below market. So we looked at that transaction and nicely accretive for us. So we're going to move forward with it if due diligence all pans out, which we're in the process of doing right now. But after that, we've kind of gone down. And that may change. you know, when we see how the Western Canada portfolio goes on the sale process, because then we will have some cash again, but we're being more selective because you can see we have a number of development opportunities. So we will need cash to complete those. So, and those are higher returning for us. So we're kind of focused a little bit right now on that development side, insuring through what we have and, and, I'd say be very opportunistic on the acquisition side if we see a deal like the one in southwestern Ontario, which I forgot to answer, is a separate vendor than our London vendor. If we see that kind of deal come forward, we'll act on them. But this one was just the pricing was exceptional and we jumped on it.
spk04: Okay, thanks for that. And just two kind of quick housekeeping modeling questions. Um, the vendor rent obligation added to FFO is up, uh, you know, maybe about 150,000 sequentially. I'm just wondering how we should interpret that, that your expectation of kind of the NOI, um, you know, once that becomes fully operational.
spk05: Yeah. So, um, I think we added, uh, we added August and July. Um, and so, you know, we amortize in, uh, the amounts that, that are current, uh, and we accrued two months up till September 1st, I believe. I think that there's roughly about $200,000 a month of vendor rent obligation that'll come back to NOI once that phase one is fully tenanted and the tenants are paying rent. So there's two adjustments happening. There's the adjustment for future, like the adjustment that's going through other income for future NOI, and then there's the stuff that we would have accrued last quarter that we're adjusting in our normalized AFFO form.
spk04: Okay, no, that makes sense. And just the last one is, are you able to provide a little more detail on the FX loss and maybe why it's just not added back to your FFO?
spk05: Well, we follow the REALPAC white paper and it doesn't seem to allow for a FFO ad back. It allows for an ad back where you have foreign investments that are being translated back, but doesn't allow for any other ad backs. So we've got about a $10 million US liability that sits on our balance sheet relating to an acquisition that we completed in 2021. And so when we fair value that to the FX rate at the end of the quarter, it generated the $500,000 FX loss.
spk04: Okay, understood. Thanks for that. I'll turn it back. All right. Thanks, guys.
spk01: Our next question comes from Gaurav Mathur of IA Capital Markets. Please go ahead.
spk02: Thank you, and good morning, everyone. A couple of quick questions at my end. So, you know, we've seen this period of price discovery happen across most industrial markets in Canada, even though there has still been a record high demand for assets. So just in your opinion, do you think we're closer to finding a tentative flow price in some of these markets, or are there still some ways to go, given that underwriting remains extremely strong and rents continue to grow?
spk08: Yeah, it's interesting time right now, right? Because of interest rates and where they're going to settle. So it looked like, I don't know, a month ago, three weeks ago, the five-year was so expensive that we thought there'd be some cap rate decompression. But now it's going the other way. And it's an interesting time just to see where demand is going from an acquisition side. So a lot of guys have gone pens down. So the number of buyers there right now are fewer. But I expect that to ramp up in the fall. And then from a rental rate standpoint, I think there's still significant room to grow. You're seeing it in the GTA. You're seeing it in Southwestern Ontario and, I think in London they quoted new rental rates of 11 and change. Well, I think that's slightly optimistic just because it was based on relatively few transactions. The rental rates are pushing and they're continuing to push. So I think we still have quite a bit of steam in the rental rate growth and a last end in Ontario and Quebec. And I think we will see pretty strong activity in the fall. That's what I'm predicting.
spk02: Okay, fantastic. And just staying on the rental rate theme here, how are you thinking about leasing velocity going into 2023 with the upcoming lease renewals? I mean, is that something that's proving to still be a bit of a pen down situation among possible tenants? Are tenants pushing forward and looking for space in the non-core markets?
spk08: No, for sure. We're in discussions on expanding existing tenants in our portfolio. We're lucky to have quite a bit of land that we can build on. Some of our largest tenants that really aren't going anywhere are looking to expand their space. And I'm talking about a tenant that's in at $4 and change, and that rental rate is going to be significant. And if we can build, it's going to be a nice return for us there. So we're seeing rental rate growth across the board. So I think overall, and even in Edmonton and Calgary, you're seeing movement. You're seeing strong demand there. So I think overall the fundamentals in the industrial sector are still strong. You'll see them strong in 2023.
spk05: I think we're seeing early renewal discussions more often than tenants putting off renewals.
spk02: Okay, great. And just lastly on this, how are you thinking about leasing costs going forward? Because I understand that tenant demand is there, but is there anything on the leasing costs which may surprise on the upside?
spk08: It depends. I mean, when we're talking about some of the ones that we have here, other than a possible broker commission, there's no significant leasing costs here, especially in the southwestern one, which is southwestern Ontario, which is the majority of our expiry. So the demand is such that it's a landlord market, not a tenant market. So that bodes well.
spk02: Okay, great. Well, thank you for the call, everyone, and I'll turn it back to the operator. Thanks.
spk01: Our next question comes from Jimmy Shen of RBC Capital Markets. Please go ahead.
spk03: Thanks. Good morning. On your lease expiry schedule, in 2024 in Alberta, there's about 245,000 feet coming in. do and it's at $19 rent. I just wondered if you could talk a little bit about that. I'm not exactly sure, but that really is just, it just kind of stands out on the, on the schedule.
spk05: Yeah. So I believe that's, um, Mass Tech, uh, one of our tenants in Black Falls, Alberta. Um, so I think currently they're subletting, um, And there's a fair amount of land attached to that, which is why the rental rate is higher?
spk08: Yeah. And to be honest, at this point right now, those markets are improving. But I think we'd be a little bit high on a rental rate renewal, but it's a little bit too soon to tell.
spk03: Okay, and the majority of that 240,000 square feet are those guys?
spk05: I think the other one in there is Canada Cardage towards the end of 2024. I honestly don't have 2024 in front of me, but I can certainly get back to you with more details off the call.
spk03: Okay, thanks. And then I guess similarly, In Ontario, in the next couple of years, rents are kind of at mid-fives, high fives. And you were saying earlier that South Winton, Ontario rents are around $10, $11. Is that about right?
spk08: Yeah, there were nine and change last quarter in the last CBRE report had them at $11. I think $11 was a little high. So I think... When I'm looking at things, we're looking at somewhere between 9 and 10 going forward.
spk03: Okay. And I think I might have misheard, but when you're doing those lease deals, what are the contractual step-ups? Is it the three, three and a half that you've done recently?
spk08: No, it's more like 69% on the ones that we've done recently. I'm sorry, six to nine annually? Yeah. For example, and I guess it depends on the lease, but when I'm looking at two of the larger ones here, one has almost 10% annual increases and the other one has probably more like seven.
spk03: And this is off a nine to $10 rent?
spk08: One of them is off of $750 rent, so it's a long-term tenant, or $650 rent, and we kept it down to then increase him significantly throughout his term. Okay, I see.
spk03: Yeah, so it depends on where we started them. Right, right, okay. Yeah. Okay, and then just on that, Seth, Western Ontario, that's in Diligence. Can you share maybe a range, a cap rate range? You talked about how it sounds like it's a really good deal or even a range of price per foot. Seven. Seven. Okay.
spk00: Yeah.
spk03: And is it, I mean, obviously that's not the market, I would assume. And so is there, provide some context as to the circumstance that has arose for you to be able to get such a good deal?
spk08: Not really. I think the vendor chose to deal with us knowing that we typically close and were easy to deal with. So it was, I wouldn't say necessarily a sophisticated real estate vendor. So that's not their business. So I think it was just a strong deal. And we're happy to see it.
spk00: Okay. Thank you.
spk05: Getting back to your question, there's eight expiries in 2024 that are making up that total in Alberta. They're making up that total in Alberta. And they're roughly 20,000 to 50,000 square feet. And I'd expect actually most of them will renew, but it's still early. I would think that the rents on renewal there would be relatively flat, just slightly positive.
spk03: Okay. Even the one that's subletting the space? You think that you'd be able to renew at that same high rate?
spk05: Yeah, so the sublet I think is actually 2025 In 2024, Alberta, after having looked at the details, it's a number of smaller square footages, some light industrials, some warehousing.
spk08: On average, I think we'll have... I'd say it would probably be flat, if anything. It's
spk01: not it's not too far below because when i look at it it's a mixed bag here okay great thanks thank you you can take the last call in the queue our final question comes from david crystal of echelon capital partners please go ahead
spk07: Hey, thanks, guys. Just really quickly building on Jimmy's question there, do you have a figure for maybe a portfolio-wide mark-to-market gap in the industrial portfolio?
spk05: We don't. We provided the leasing details by province, the expiries by province, to allow for analysis. But we're not publishing market rents. We have significant lift in Quebec. We're probably relatively flat in Canada, I would say. But yeah, we don't have it in total.
spk07: Yeah, so it would be fair to say that I think you provided a lot of detail on Ontario there and kind of rents probably pushing to double digits. But if I look at kind of Alberta, Saskatchewan, Quebec, broadly, there's not a huge amount of upside from current levels. Would that be fair to say?
spk05: I think Quebec is fairly strong in terms of upside. In the near term.
spk07: I guess you've just got half a million square feet already at that 14 level, so it's a lot of the near-term upside.
spk05: Yeah, there's not a lot of square footage coming up in Quebec in 12 months. Agreed.
spk07: Okay, that's helpful. And maybe building on the other line of questioning there, you mentioned in Saskatchewan in the MD&A a roll-down on one lease. Is there any other near-term risk of roll-downs that you see?
spk05: I don't think near-term. I think towards the end of next year we might see one or two. So the one in Saskatchewan and a couple others where we might see a little bit. Those are properties that have quite a lot of land attached to them. Those markets are shifting a little bit. There's a lot more activity with oil prices increasing, but we might see some decrease there. That's where we're in that Those are leases where we're in that $19, $20 range, and one of them's a little bit higher just due to the amount of land attached and a relatively smaller building. So yeah, we could see towards the end of 2023 on some of those properties some decreases, but should be offset by leasing at other properties in the market.
spk07: Okay, fair. And maybe just quickly on development, you mentioned obviously the economics are superior and you're pursuing development where you can. Can you maybe talk about the delta on development yields versus transaction cap rates?
spk08: Yeah. So, I mean, what we're expecting on the development on our existing portfolio, so especially in southwestern Ontario, it's going to be somewhere between 8% and 10%. which is very strong. I think in Saskatchewan, if we're able to secure a tenant for the 300,000 square feet, it would be significant. Well, probably about an 8%. And then in Ontario on those development projects were probably five and a half to six.
spk05: Yeah. I'd say that the yield on the, uh, the projects where we don't, where we didn't own the land and we're not adding square footage is going to be lower definitely. So yeah. And that may be five, five and a half percent.
spk08: Yeah. And you know, the Southwestern Ontario portfolio is really good because you know, the one where we're adding the a hundred thousand square feet of spec, we can probably add on another 150 onto that site. One of the other ones that we're talking, expanding the tenant, you know, by 70, 100 to 125,000 square feet, we potentially could add, and we're talking with the city about potentially adding another 200,000 square feet on top of that. So, and then the one we close on next year in March or April, that is a very growing logistics company, strong growing Southwestern logistics company. And I predict that by the time we take possession of that building, they're going to come to us to ask to build another 150,000 square feet. So the availability for us to develop on our own land in London is huge at those type of returns.
spk07: Okay, perfect. That's helpful. I'll turn it back. Thanks. Thank you.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Mr. Hansik for any closing remarks.
spk08: All right, everybody. Thanks so much. And we look forward to next quarter's conference call where we start to see some of the significant rental rate increases. So we will talk next quarter.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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