Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the Nexus Industrial REIT fourth quarter 2023 results conference call. As a reminder, all participants are in listen-only mode. 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 one on your telephone keypad. To do 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 Hansik, Chief Executive Officer. Please go ahead.

Thank you. I'd like to welcome everyone to the 2023 Fourth Quarter Results Conference Call for Nexus Industrial REIT. Joining me today on his inaugural call is Mike Rall, 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'll be discussing non-GAAP measures. Please refer to our MD&A and the REIT's other security filings, which can be found on our website and at cdar.com for cautions regarding forward-looking information and for information about non-GAAP measures. In the fourth quarter, we continued to benefit from our strategy as a Canada-focused pure play industrial REIT. Despite a challenging market backdrop, we delivered another quarter of solid results. And this year, we are well positioned for the next phase of growth as we expand same property NOI, capitalize on recent acquisitions, and bring four exciting new development projects online. Our industrial NOI weighting now sits at 93%, and we plan to further increase this and strengthen our balance sheet at the same time. through sales of our legacy retail, office, and non-core industrial assets. Beginning with our operating results, fourth quarter net operating income grew a healthy 17.1% year-over-year to $29.2 million as we benefited from $378 million of strategic acquisitions that we made over the past year. The portfolio also experienced healthy same property industrial NOI growth of 2.9% compared to the fourth quarter of 2022 and 4.3% for the full year. This growth is a testament to our strategy of embedding annual rental steps into our leases and to healthy rent lifts we are earning on renewals due to market rents that are on an average 29% above, it's actually 24% above in-place rents. We will continue to benefit from these attributes for the next several years. On a total company basis, same property NOI in the quarter grew 1.3% compared to a year ago. as some of the strength in our industrial portfolio was offset by a temporary contraction in our legacy office and retail portfolios. Looking to 2024, due to a key vacancy, which I mentioned last quarter, I anticipate slightly softer same-property NOI for the first quarter. However, for the remainder of the year, I expect that we will be benefiting from positive lease renewals and that we will average mid- to high-digit same-property NOI growth for the full year. Compared to last year, we experienced lower normalized AFFO per unit and consequently an elevated payout ratio for the quarter. This was mostly due to higher interest expense on a per unit basis. This temporary circumstance will normalize as our Titan Industrial Development Park comes online in the second quarter. For the full year 2024, we expect our normalized AFFO payout ratio to average in the mid-90s. The leasing market was strong through the majority of 2023. However, it has shown signs lately of decelerating. In anticipation of a deceleration in early 2023, we deployed a leasing strategy to early renew large tenants that had leases expiring the next three years. As a result, our industrial occupancy improved compared to the third quarter, growing to 99%. Our high occupancy is a testament to the quality of our portfolio, anchored by strong tenants and a proactive leasing strategy. At December 31, 2023, our NAV per unit was $12.87, a 68% per unit increase from a year ago. Our weighted average cap rate increased by 86 basis points to 5.89% in the fourth quarter, compared to 5.03% a year ago. During the quarter, we engaged external appraisers to value properties tolling approximately $200 million, leading to a net write-up of $13.5 million for those properties. Overall, the fair value of our investment properties increased by $35.5 million in the quarter. In the fourth quarter, we continued to high-grade our portfolio with the acquisition of a 336,000-square-foot newly expanded Class A distribution center in London, Ontario. The property is leased to a single tenant with contractual CPI rent growth. We purchased it for $55.8 million, which was satisfied to the issuance of 2.4 million Class B LP units at $11.30 per unit. and cash consideration of $29 million. In addition, on January 3, 2024, we closed on the acquisition of a single-tenant Class A 82,500-square-foot industrial building in Calgary, Alberta, for a cash of $35 million. This property was newly built for one of our existing tenants and is under a long-term lease with embedded contractual rent growth. Over the past three years, we have invested roughly $1.4 billion in strategic acquisitions, and I'm very pleased with the outcomes. However, our focus now will turn instead to deleveraging through orderly sales of properties that no longer fit into our long-term strategy. This will include our legacy retail assets, our seven old Montreal office buildings, and our three suburban Montreal office buildings, which are in various stages right now of sale process. In addition, we are looking at the potential disposition of a group of non-core industrial buildings. In total, this would equate to approximately $200 million in sales. Despite the weaker office market, our properties are generating significant interest. We are not in a rush to sell them, so we are moving forward in an orderly manner to ensure that we maximize our value. I expect the property sales to close in the second half of the year and plan to use proceeds to reduce our debt balance. In 2024, we expect to benefit from the completion of four significant industrial development projects. Combined, these properties will add annualized stabilized NOI of approximately $11 million. Our 312,000 square foot Park Street intensification project in Regina is nearly complete. The primary tenant is taking 200,000 square feet and has begun to move in. Their occupancy officially starts in April. We are marketing the remaining 112,000 square feet and hope to have at least shortly. This project will contribute a yield of about 7.5% of total development costs of 48 million. At Hubrie Road in London, Ontario, Construction is moving along nicely. Leasing interest is picking up as the building is taking shape, and we hope to have good news on the leasing front shortly. This project will contribute about a 9% yield on total development costs of $15 million when it is completed in the third quarter. The project further strengthens our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada. At our 116,000-square-foot Glover Road development in Hamilton, the steel framing is up, the roof deck is complete, and the flooring is being poured. The property has industry-leading 40-foot clear height and is expected to be LEED certified. We are in the process of finding a tenant, and it is to be cash flowing in the second half of the year. We own 80% of the property, and we're in about a 5.6% going in yield on development costs of $33 million. Steel has been ordered and earthworks are currently underway at our 240,000 square foot Dennis Road expansion project in St. Thomas, Ontario. This expansion is for an existing tenant and we will earn a development fee through construction to eliminate any kind of cash flow drag. We expect construction to be complete by the end of the year, at which point the tenant will pay contractual rent equal to a 9% yield on the estimated development cost of $15 million. Richmond, B.C., again, we are just hoping occupancy is soon approved by the city. There is very little left to do in the Boulevard Club, so we're expecting it any day. It has been a frustrating process, but last week I went to see it in person. It's actually a really beautiful property. It's done a great job. The landscaping, glass-walled squash courts, the only ones in Canada, padel courts, pickleball, and top-tier swimming pool. So we believe the facility will be bustling when it finally gets to open. We expect the club will be able to hopefully take occupancy in the second quarter of the year. 2023 demonstrated the strength of our strategy as Canada focused pure play industrially. In what was a tough year for the real estate industry, we were able to continue to grow, add value and deliver solid results. The good news is we are not finished yet. In 2024, we will have a full year's contribution from our acquisitions. And while in the first quarter we anticipate slightly softer same-property NOI, for the remainder of the year we expect to benefit from positive lease renewals resulting in mid-to-high single-digit same-property NOI growth for the full year. Also, we will complete our four exciting new development projects and begin to have them cash flow. Lastly, we will focus on our portfolio through the strategic dispositions and use the proceeds to de-lever our balance sheet going forward. I'll now turn the call over to Mike to give some color on our financials.

Thank you, Kelly, and good morning, everyone. Starting with the headline earnings in the quarter, net income was $2.1 million, an impressive $19 million increase compared to the net loss of $16.9 million last year. The increase was primarily due to a positive fair value adjustment on investment properties of $35.5 million in the quarter, compared to a negative adjustment of $8.1 million in 2022. This was partially offset by unrealized losses on interest rate hedges of $21.9 million in the quarter due to falling midterm interest rates. As Kelly mentioned, net operating income continued to be strong, increasing 17%, or $4.3 million year over year, to $29.2 million. Of this amount, New acquisitions accounted for $4.5 million, and same property NOI growth added $0.3 million from embedded rent steps, CPI increases, and renewal lease lift. This growth was partially offset by the absence of $0.8 million of NOI earned in the fourth quarter of 2022 from properties that have since been sold. Normalized ASFO for the period was 15.1 cents per unit, a decline of 2.6 cents from a year ago, as the benefit from higher per unit net operating income was more than offset by higher interest expense per unit. Total general and administrative expense for the quarter was $3.2 million. Excluding severances and one-time compensation-related expenses, G&A was $1.5 million and which was flat on a year-over-year basis. Net interest expense for the quarter was $12.4 million, a $4.2 million increase from the same period last year. This increase was primarily due to a higher outstanding average debt balance during the period. I'm also pleased to share that a couple of days ago we added a further $100 million of committed capacity to our unsecured credit facility. bringing the total facility size to $625 million. We also extended the maturity by an additional year to March 2027. This larger facility gives us a significant liquidity cushion and the ability to continue our transition to an unsecured borrower, which will ultimately give us access to a wider range and deeper pool of capital. I'll now turn the call back to Kelly.