Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT first quarter 2023 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 Kelly Handrick, Chief Executive Officer. Please go ahead.

Thank you. I'd like to welcome everyone to the 2023 First Quarter Result Conference Call for the Next Industrial Week. Joining me today is Robert Chasson, Chief Financial Officer of the REIT. Before I 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 2023 has begun as expected with our southwestern Ontario portfolio providing strong rental rate growth on renewals. We'll continue to see strong growth in this market for this year as rates are now pushing in the $11 to $12 range. This will be tempered by a 26,400 square foot vacancy in Fort St. John, B.C. that vacated on April 30th that we're working to fill. In the quarter, we purchased a 532,000-square-foot brand-new Ford distribution center in Ottawa, Ontario, and sold one of our grocery-anchored retail properties in Victoria, Quebec. In addition, we closed on a 264,600-square-foot distribution center adjacent to the London, Ontario airport, where in-place rents are approximately 260% below market, with a short-weighted average lease term of just over two years. This increased our weighting to the industrial sector to just over 9% of the REITs NOI. We'll see this continue to grow in 2023 as we add another 970,000 square feet of industrial properties throughout the year. Comprised of a 191,000 square foot Class A distribution facility with Yokohama Tire as a tenant in Montreal, and a 304,000 square foot Class A distribution facility in London, Ontario, which is anticipated to close on June 1st, plus 141,000 square foot Class A distribution facility in Burlington, Ontario, and then finally another 335,000 square foot distribution center in London, Ontario. That's expected to close, I believe, in August. Our waiting will continue to grow as we close on these assets and recycle out of our retail and our office portfolio in the balance of the year. On the development front, we have broken ground on two sites, approximately 96,000 square foot addition to our building at 1285 Hubrie Road in London, Ontario, where we are awaiting finalization of a deal that will provide us an outside return of over 10% upon completion. As mentioned previously, we have broken ground on the 312,000 square foot new building on 22 acres of excess land at the Titan Industrial Site in Regina, Saskatchewan, that was acquired in February of 2022. We have a signed lease in place for a minimum 200,000 square feet with a strong covenant tenant from the leased portfolio, and we are fairly certain they will sign on for the majority of the balance of the space. This is scheduled to be complete for the late spring 2024 delivery. It also looks like we'll be proceeding in the fall with the expansion of an existing tenant in our Southwestern Ontario portfolio to add another approximately 70,000 square feet to their existing premises. We will be purchasing 18 acres of land adjacent to this site to accommodate this expansion. This site is across from a newly announced Volkswagen lithium plant in St. Thomas, Ontario. In Richmond, B.C., we continue working to complete the space for the Greater Vancouver Sports Club. The site is progressing along. They are currently taking memberships and hope to have them live and operational soon. somewhere at some time in August. This will be a significant boost to our FFO once the tenant commences operation. We'll now hand it over to Rob Chason to go over the REITs financials.

Thanks, Kelly. Year over year, same property NOI was up $900,000 or 4.4% for the quarter, benefiting from strong renewals in southwestern Ontario. Ontario accounted for just under 40% of same-store NOI growth. Alberta, where we have a number of leases with embedded CPI increases and where occupancy at one of the REITs properties improved in Q1 2023 as compared to Q1 2022, accounted for just under 20% of the increase. Approximately 20% or $150,000 of the same store NOI improvement related to our St. John New Brunswick office property, where there were free rents in Q1 of 2022 that did not recur in Q1 2023. As Kelly mentioned, we will experience some headwinds from an April 30th expiry in Western Canada. However, we expect significant rental rate growth on lease renewals, Southwestern Ontario lease renewals in Q2 2023. Notably, we have a contractual rental step of $0.78 per square foot on a million square feet that is effective August 1st. Kelly mentioned the repositioning of approximately 60,000 square feet at our Richmond, D.C. properties anticipated to complete in the third quarter. Upon completion, this is expected to have an approximately $700,000 positive quarterly NOI impact. Q1 2023 general and administrative expense increased as a result of timing of RSU grants, one-third of which vested in Q1 2023. There was also a severance cost in the quarter. These two items primarily accounted for the increase in general admin expense in Q1 2023 as compared to Q4 2022. Interest expense was relatively flat in the first quarter as compared to the fourth quarter. $117 million acquisition of the Ottawa, Ontario area Ford Distribution Center closed on March 1st and was financed with variable rate debt drawn on the REIT's unsecured credit facilities, which will increase Q2 interest expense. Debt to total assets was 47.3% at March 31st, 2023. We had $200 million on drawn on our unsecured line of credit, and we had $455 million in our unencumbered asset pool supporting the unsecured credit facility. And I'll turn the call back to Kelly.

All right, thanks, Rob. We'll open up the line to questions.

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 star, then 2. The first question comes from Fred Blondeau with Laurentian Bank Securities. Please go ahead.

Thank you, and good morning. It looks like you continue to see solid traction in southwestern Ontario and in Montreal. That said, looking at Toronto and Montreal, they were in negative absorption territory in Q1. I was wondering if you could give us color on what you see on the ground in terms of new supply, your tenant decision-making process, and whether you see – I guess, at the end of the day, whether you see increasing risks in some of your markets, at least for the rest of the year or beginning of next year?

Well, let me start. London, definitely, we are seeing huge traction. Just, I swear, about a month ago, we were looking at $10 rents. Now, all of a sudden, we're pushing $11, $12. So, there is significant demand in that market. For example, on that 96,000 square feet, we're holding out for one of our existing tenants because we have negotiated a deal that we're trying to finalize that we'll see pretty large returns on that expansion of could be over 12%. And we have two or three other tenants clamoring for the space. So Leasing that is not difficult. Anything that comes up is taken right away. So the demand is extremely strong. We're looking at also breaking ground in the fall in a site in Hamilton that we have, and there's been fairly significant activity, and we haven't even got to the groundbreaking or the design phase being marketed. So the fundamentals are still very, very strong. I haven't seen any kind of let up yet. Montreal, same thing. I'd say maybe on the outskirts of Montreal, you'd see it's taking a little bit longer, but overall, the general, I guess, atmosphere in the environment for industrial spaces, there is still significant demand, and we'll see over the next, I guess, year and a half in GTA Montreal as space is delivered. But Montreal, for the most part, that space has been already absorbed fairly well, and in GTA. So I think overall, fundamentals are still really strong. I don't see any sign of let-up yet. Could be next year things start to ease off slightly, but that's to be seen yet.

That's great. Thank you. And the 12%, you mentioned, that's unlevered, correct? That'd be unlevered, yeah. Yeah, perfect. Thank you. And then congrats on the disposition of Victoriaville. Are you able to give us kind of a range on the implied cap on that one?

I believe it's around 7%.

Okay, that's good. Thank you. Yeah, it's good news.

The next question comes from Mike Marketo with BMO Capital Markets. Please go ahead.

Thank you, operator. Hey, Kelly and Rob. Just with the – I think last call we got to 4% being your outlook for same property growth this year. Obviously, you did that a little bit better than that in the first quarter. But you also flagged that temporary Fort St. John vacancy. So, you know, just with all those puts and takes there, would 4% still be your expectation for the whole year?

It would be, yes.

Okay. And just to clarify, does that include the $700,000 quarterly contribution from the Richmond property? It does not. It does not. Okay, great. Awesome. For the three projects, active development projects that you have underway, thank you very much for your comments and disclosure and yield expectations and total costs, the figure is probably not that significant in terms of total investment to date, but I just wonder if you have the actual remaining capital required to fund those projects. Yeah, so we haven't, we've spent a couple hundred thousand dollars so far, I think, on the Hugh Green London project. So, I mean, pretty much the entire cost of the expansion is still on the scale.

Yeah, we've just begun, so the The incurred costs now are just really for drawing permit applications.

Okay. And for when it's an expansion, is there existing financing on the asset? And then I'm not sure if you're going to just fund it through your line or put some construction financing on the project to complete the expansion. But just maybe if you could discuss that dynamic and then if you do put construction financing, how you handle the takeout, if there's existing financing on the asset. Yeah, so currently we're looking at financing it under the unsecured credit facilities, which is a little bit cheaper in terms of upfront fee and ultimately growing cost interest expense as well. So that's the plan. I think these properties sit as part of our unencumbered asset pool, and so construction financing would be problematic anyway. So, yeah, that's the plan. Okay, so they're in the pool if you didn't secure mine. Got it. Okay, that's it for me. I'll turn it back. Thank you. Thank you.

The next question comes from Brad Sturgis with Raymond James. Please go ahead.

Hey, guys. Good morning. Just to, I guess, follow on the lines of the development disclosures and pipeline, I just want to clarify – Is your expectation for now just only commence St. Thomas in the back half of the year, or is there anything else that could maybe break ground this year at this point?

It looks like we'll break ground on one of the Hamilton assets that we currently have, so it's about 115,000 square footers. Probably, I would say, late fall on that one.

Okay. And everything else that's in the planning stage, you know, the – How much of that in theory could break around next year?

Well, I'd say probably definitely there's the potential for one in Windsor 65,000 square footer that we're just waiting on approval to go ahead with from the tenant. So the other ones would probably be later in the year. I'm imagining because it does take a little bit of planning. um, with the city and as the majority of them are in London, um, expansions online that we have. So it take a little bit longer to work through permitting and, uh, approvals from the city.

You have, uh, you know, a decent pipeline here and you're working through, uh, you know, the various opportunities. Is there an ideal amount of development that you want to take on at any given time? Just, you know, maybe, uh, from a capital allocation or just amount of development exposure that you would want to have at any given time?

Yeah, I'd say what we're building this year is kind of what we would target. We're lucky to have the land to be able to build on, and the returns that we're going to be getting are much better, obviously, than what you can buy in the market for that type of product. We're talking... 9 to 12 on leverage. So, I would say that, you know, next year, if all went well, we could be somewhere around the same.

Okay. Just switching gears, just on the asset sales program, congrats on Victoriaville. Just curious, I guess you've got a small handful of assets listed for sale still today. I think we've talked about it in the past. Where would you be on those assets, on selling those assets? Are they on the market today? And what's your, I guess, current timing for when those transactions could occur?

I'm hoping, I'm hoping if all goes well, that we'd be out of the majority of it this year. So the three standalone office properties that we own 100%, I would like to be getting out of hopefully in the next two quarters. And then I would say the majority of left is the large standard portfolio, which I have had pretty solid discussions with them on that front. So we have some interested parties in that take out of our portion. So I'm optimistic that something will be done by the end of this year on that. Hopefully, all goes well. By that point, with what we have closing and if we sold that, we would be pushing probably 98% industrial, just left with a spattering of assets here and there that we would then invest in next year. We're well on our way to that 100% number.

Does that mean I mean, that's good to hear. I'm curious if that would also include your 50% interest in Stanley Street.

I would say that would probably be next year, but yes, that would be something that we would be looking at as well. We do have an office there, and it's our Montreal head office, so as you get to just To get out of that, I mean, it's not a huge part of our NOI. So at the end of the day, if I did, it would be probably next year.

And at this point, I guess the focus would still be the non-industrial assets. Are you contemplating anything in terms of assets on the industrial side, or you've got enough to work through, I guess, on the non-industrial assets that you're working through?

Yeah, we do get calls, you know, for Western Canada stuff. There's nothing already here that we want to get rid of. We've had some guys we've tried to do swaps with with certain assets, which could still happen, but I would look at some of our smaller, if the prices were right, out in Western Canada. I think that over the next, I'd say, months, maybe we'd move one or two smaller ones, and I don't see anything probably too much more than that, but we do get inbounds quite a bit. So, yeah, we'll see how the rest of the year goes on those.

Okay. Sounds good. I'll turn it back. Thanks.

The next question comes from Kyle Stanley with Desjardins. Please go ahead.

Thanks. Morning, guys. Morning. So just given the significant rent increases you talked about in Southwestern Ontario and more specifically London, you know, it does seem like demand is still strong, but are you starting to get any pushback from tenants or are they in realization that this is just market at this point?

Yeah, you know what, I think, I think guys are realizing what's happening to the market and what I'm actually seeing, guys are scrambling to get into it now before things keep increasing. So yeah, The one we purchased that we just purchased in London sits with a $4.50 rent and that's going to be a huge win for us in a couple of years when that comes up strategically located. I am positive we will have a zero problem either renewing or releasing that space at those rents. It's well located. It's a fantastic asset. I think tenants are slowly, especially in southwestern Ontario, starting to realize rents are no longer $7 a foot. And so it's been an interesting and a very rapid progression.

Okay, that makes sense. And just on the, you know, just under 160,000 square feet you renewed in Ontario this quarter, what was the annual escalator that you achieved?

Contractual increases.

To be honest, I'd have to get back to that on cloud because I have to just see what goes into that, which ones. But I think it's – All good, no worries. Yeah, a couple of them are in London, and they're pretty strong rental rate increases. So I'll just – we'll get back to you on the actual details.

Sure, no problem. And then just the last one for me. You're talking about St. Thomas. Obviously, you have the Volkswagen facility going in there. So two things, I guess. how much would you expect to spend on the 18 acres to facilitate that expansion? And then secondly, you know, is this now a market that, you know, you already do have exposure there, but would you be looking to ramp up that exposure? And, you know, have you seen any changes in pricing at this point?

Land is starting to go up. So that's very interesting. But this one in particular, if we're purchasing 18 acres of land, 18 acres at about $400, I believe it's like $4.5 million for 18 acres. Our total cost would probably be in and around $18, $18.5 million for that site. But we've, in this whole negotiation, we have a specified return, so it's literally taking the return applied to a rental rate and away we go. To answer the question on Actively looking, we have a fairly substantial pipeline of assets down the line with our partner that we'll roll in over the next several years. So actively looking are where we're looking for more deals where we can see significant upside on renewal, like we just pulled off on the one that we closed on. So I'd say outside of the family that we are looking for more the lower in place rent that we think we can really set much higher.

Okay. Fair enough. That's it for me. I will turn it back. Thanks.

The next question comes from Matt with National Bank Financial. Please go ahead.

Hey, guys. Just wanted to quickly get a sense on the financing side. whether your intent is to use kind of unsecured facilities to finance the assets on the debt side versus secured financing against them, and just what would be the relative cost. I know that you've swapped some of the interest expense. But, yeah, any color on that front.

Yeah, so... That's a discussion we had at the board level on Friday in terms of hedging and swaps. So our swap, the swap we entered into I think in March was 4.96%. I think that five-year swaps right now are running about five and a quarter, somewhere in around there. So we're trying to build the unencumbered asset pool. We're trying to get ourselves to the place where we could become rated and potentially issue public unsecured debt So as you mentioned, there is a bit of trade-off there. So putting a swap in place on the unsecured facility is probably about 40, 50 basis points higher interest costs than a vanilla mortgage. And so that's something we're considering sort of balancing off one option against the other. But I think we'll likely continue to finance off the credit facility and look to swap out a greater portion of the credit facility.

And then, so if I look at, I think you have 6.6% financing on the banker's acceptance component, but it looks like a little less than half of it is currently swapped. if you go the route where you swap it as opposed to, uh, getting secured kind of traditional mortgages, would we expect that the swapped portion goes up and that rate comes down? And then I guess also, if you could just give a sense as to where your unencumbered asset pool is right now, value wise.

Yeah. So the swap portion would go up and yeah, exactly. Um, and I think we did for unencumbered pools, 455 million as of March 31st. And then we acquired the, uh, Well, that would be subsequent to the acquisition of Castleman. So, yes, that's about $455 million. Okay.

And do you have a sense as to how far off you would be potentially from an investment grade credit rating at this point?

In terms of time, we're probably looking at next year. I mean, there's no huge rush right now, I don't think, to be able to issue public debt. We can get similar pricing by way of, you know, financing on the facility with a swap. but, you know, we need to increase our EBITDA a little bit, you know, work on some metrics, so probably looking at about next year, early next year.

Fair enough. That's very helpful. Thanks, guys.

The next question comes from Manju Gupta with Kosher Bank. Please go ahead.

Thank you, and good morning. Good morning.

Good morning.

So just from the London, Ontario, obviously the market is performing very well. You mentioned rents are pushing higher as well. From IFRS perspective, did you make any adjustments this quarter for IFRS valuation for London portfolio?

No. We built in market rents in Q4, interstabilized, analyzed, and then present valued back. So there wasn't a need for adjustment in Q1.

Okay. And, Rob, what kind of cap rate or, you know, on a ball-up-of-foot basis are you marking your London portfolio for IFRS?

I'd have to look it up. If you give me a minute, I can come back to you. Do you have other questions?

Sure. Sure. Absolutely. So, you know – okay, thank you. And then just moving to the development side of things, I think the Hamilton development at the Overroads – the cost of $30 million, is the development cost a bit higher than your initial expectations there? Any color on that?

No, I think it's all within the model. So I think costs are coming in where we anticipated.

Okay. So Kelly, the Hamilton market is now like the cost is like $260 per foot. So do you think the stabilized assets in Hamilton are like $300 per foot as well, just like, you know, inside the GTA, inside the field?

Yeah, yeah. I mean, cost of land, right? Cost of land has gone up significantly. So at the end of the day, for a new build, anywhere you're probably in that $275 to $300 and change.

Okay. And then you have another Hamilton development coming up. So should we expect like similar kind of costume as well?

Yeah, I believe so. And that's a bigger development. The second one that would go wouldn't be until probably next year, end of the year, I think. And you're looking at somewhere around a little bit over a million square feet that can be built there.

Thank you. And then just shifting on the leasing side, I'm looking at your Alberta industrial portfolio. So is there any fixed price renewal options in that portfolio in Alberta? Just trying to see if we should expect any more downside to, you know, the current investments.

So for this year... I don't think there's any fixed renewals.

No.

No fixed renewals. We... The two NASDAQ sites are the ones that are going to hurt us a little bit, where they came off April 30th. And when I look at the balance of the portfolio that comes up this year, Edmonton, and it's pretty much Edmonton, and I believe the market rents are probably slightly below. So nothing crazy, maybe $1. about the foot on some smaller renewals that come up the balance of the year.

All right. And tell me, what about the next year in Alberta? So I see, you know, 250,000 square feet coming up, almost $20 rents. Any thoughts on that?

I would. I have to pull up next year to see what we have expiring. I know we had a couple... that have already renewed, and we've renewed them down to market. They're not massive sites. So, to be honest, I'd have to look at them and get back to you, Himanshu. Sure, fair enough.

And, Rob, do you have your address for London?

Yes, I have a five-and-a-half cap.

Five-and-a-half cap. Okay. Thank you, guys. I'll turn it back. Okay.

The next question comes from Jimmy Sean with RBC Capital Markets. Please go ahead.

Thanks. So on the contractual rent increase, I think you've been doing deals that are with higher rent escalators of late. So do you have a sense of where a contractual rent increase for the entire portfolio, what does that look like today? Okay. We don't.

That's something we're going to look to add to our MD&A disclosure next quarter, but it's not something that we've compiled yet.

Yeah, I know the recent ones in southwestern Ontario have been either CPI, typically CPI, or about 8% to 12%, depending on the lease that we've done.

Yeah, I'm just trying to understand that in the context of the entire portfolio, just for us to be able to model it better would be super helpful. As I said, we don't have that. We'll look to disclose that next quarter.

We're looking at it.

Okay. And then, Kenny, I think you rhymed off a few, the pending acquisitions over the next few months. Do you mind going through the the properties again and the value of the assets and the timing of the closing of these deals?

Sure. Just give me a few seconds here so I can pull them up. So the first one we have is in June. Bear with me. Okay. There we are. All right. So the first one we have is in Montreal. It's in Laval, $65 million, $192,000 square feet. That closes in June. We've got the other one in southwestern Ontario on Scanlon, which is about $56 million, 304,000 square footer. and that will close June 1st, I believe, and that's a Class PLP unit deal. And then we have Burlington in Ontario, about $49.5 million, $141,000 of GLA, and that is, I believe, closing beginning of July. And then We have the other one in London, Ontario, which again would be a unit deal, and that is probably about $51 million. I think the addition might be a little bit bigger, so that number might go up a little bit. 326,000 square feet, and that is expected when they've finished construction. I think it's going to be in August. It sounds like it's probably around August.

Perfect. Thank you. Thank you.

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

Thank you and good morning, everyone. Just on the G&A expenses, we noticed the uptick that you reported. Just wondering what a fair run rate would be for the rest of the year.

Yeah, so I think G&A was probably about 700,000, give or take, 700,000 higher than run rate. So if you take that off of Q1, probably get to a relatively decent run rate.

Okay. Okay, great. And just on the capital reserves as well, you know, we noticed that uptick there. Would that be a fair rate for the year ahead as well?

Yep. I mean, as we add new properties, we'll adjust our – They have a full CapEx reserve, but yeah, it's probably a reasonable run rate.

Okay, great. And just, you know, switching to the acquisition pipeline, as you're looking at opportunities in the market, are vendors open to doing, you know, cash and stock deals over certain assets, or is that something that vendors are shying away from currently? Okay.

No, we still got opportunities to do unit deals. Um, we have been working on a few here and there. So we'll see if we, um, I think there's still a little bit of a disconnect between, um, sellers and buyers on cap rates. Um, so that's still got to settle in. And so it's all about valuation, valuation of units. Um, there's, there's still demand for good quality assets. So, um, It's a little tougher to do, but, you know, like I said last quarter, I believe that you think it takes a little bit longer to do because someone has to get pretty comfortable with the company and what you're doing. So they just typically take longer, but we have been in discussions with several different vendors about the possibility of unit deals going forward.

Okay, great. That's it at my end. Thank you for the call. I'll turn it back to the operator.

Thank you.

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

All right. Thanks, everybody, for attending, and we'll chat next quarter, and hopefully we'll add some additional disclosure to our MD&A going forward. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.