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.

Thanks, Mike. I'm very excited about our positioning heading into 2024. Our strategy to be a Canada-focused pure-play industrial REIT is enduring and lucrative. We're nearing an inflection point as we benefit from contractual rent lifts and renewals, cash-flowing development projects, and further optimization of our portfolio of high-quality industrial assets. Confident these factors will drive meaningful, positive impact on our financial performance over the next two years. With that, operator, please open the lines to any questions.

Certainly. 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 Brad Sturgis with Raymond James. Please go ahead.

Okay. Hey guys, good morning. Maybe on the leasing front, I think 700,000 square feet in the core, you talked about being a little bit more proactive in addressing upcoming expiries. Of the leasing that was done in Q4, how much of that would have been effective during Q4? And then can you just talk through the timing of, I guess, when the other leases would become effective?

I don't have that detail right in front of me. We might have to get back to you on that one.

Okay. And what would be the update? I guess you're expecting a little bit of transitional vacancy at West that you've talked about before. What would be the update there?

Are you talking about the vacancy?

Yes.

Yeah. Yeah. So that was Canada cartage. So We actually purchased Canada Carthage's new facility in Balzac, which is just north of Calgary. They simply just outgrew our facility. So we ended up buying that and we have it vacant. So we do have a plan for it. We have fairly decent leasing interest on it right now, although it seems people are just taking longer to make a decision. And depending on when, I guess they expire. And then what we're probably going to do is, It's on, I think, effectively 11 acres, call it. So there's a cross-stock facility with a shop on five acres, and then there's another six acres that was effectively used for truck parking. To get back to our total NOI, I believe what we're going to do, and we've already gone forward with drawings into the city, we're going to develop probably about 130,000 square foot small bay facility, industrial facility on the additional six acres. And when we're done and that is complete, it would kind of get us back to where we were before Canada Carters left. So it's a way to mitigate the loss of them leaving. And we're going with Small Bay because in Calgary, the Small Bay are seen to be flying off the shelf and leasing pretty easily. So they call it 10,000 to 20,000 square footers. So that's our plan for that to bring the NOI back to where it was.

Okay, that's helpful. I guess your commentary around some of the asset sales you've been working on for a while here seems optimistic that you're making some progress for the back half of the year. At this point, how would you describe where you are? Is it just pretty advanced on discussions, or do you have potentially some deals under contract right now?

So I'm always remiss in Montreal because I find Montreal a very interesting market with the buying pool there. But on the three office assets, we are... drafting a PSA right now, so I'll give you a full update here. A PSA, we had about three or four offers, and I actually chose the one that I believe the buyer is real in that they're closers. So I'm very optimistic that that should close in the second half as we're going under purchase and sale agreement. The old Montreal portfolio, we do have an offer on, and I believe, again, it's a real buyer. I met with them on Monday. So we're in the process of just finalizing a PSA on those. Our retail portfolio, our half, so our half of that we are going to market, so we've engaged co-brokers on this one. We do have some random offers, but we're going to go to full market on that portfolio. So I'm optimistic that we're going to get a bid that we like and move forward, hopefully. And then on our non-core, that would be that West Can portfolio that we identified in prior quarters. It sounds pretty good that we're going to have a buyer. They're looking to see if they are able to get the debt that they require on it. But from a pure numbers standpoint, We're there, I think, on an agreement with them, so it's whether they can get the debt level that they require, and if they can, that looks pretty good as well. So those assets make up about roughly the $200 million-ish, give or take, of sales.

And that $200 million, that's pretty consistent to what you thought potential gross proceeds could have been, I guess, when you started this process, but it hasn't changed too much? Yeah.

Yeah, call it to 210. I just rounded it to 200. But, yeah, it's right around there. Okay.

I'll turn it back. Okay.

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

Hey, good morning, guys. Hey, Kyle. So just on your guidance, and thank you for providing that in a more formalized fashion now. That's great. Just wondering, you know, what's captured in your outlook for the year? You know, would that include NOI from expansions and potentially Richmond coming online?

So same property overall, yes, total guidance would. But what we gave there was mid to high single digit same property growth, right? So we wouldn't include Richmond in the same property growth.

Okay. Fair enough. Um, and then maybe just sticking with Richmond, uh, can you just remind us of the net FFO impact, uh, on Richmond? I know obviously a portion is included in the vendor rent guarantee, uh, but I do believe there is another portion to come online afterwards as well.

Yeah. So it's the call it, I think it's 60,000 square feet. Um, that's the club as a whole. I, God, if we can get occupancy, it's so frustrating. Um, Originally, I think it was going to be like $225,000 a month. I'm going to have to ramp that up. I believe from the start, for the first year, it's probably going to be more like $125,000 a month. We're going to step up to the full amount over the next few years to let the club... It's been such a delay. They're sitting with a waiting list of members that haven't been able to play, even though it is effectively complete. But we're going to have to let them ramp up and get their business operating to make it a successful club. So I think for the first year it's probably going to be, and I'm working through this now with them, but probably in the $125,000, $130,000 a month range of additional income. Okay.

Okay.

Thank you for that.

That's helpful. Just two other quick ones. You mentioned seeing some nice interest in the old Montreal office assets. Can you remind us of the value you might expect to get on those?

Sure. It's in and around, call it the $45 to $50 million range assets as a whole. So our half assets. call it 23, 24 million, somewhere around there. It's going to be somewhere around 23 to 25 million, I believe. Okay.

Perfect. And then just the last one, modeling question, just on G&A, how should we think about that in 2024? I think you've been pretty consistent over the last number of quarters.

What would you say for 2024? We're going to be consistent again. I think we're staffed pretty well um the finance team is ramped up we have a number of new people so i think our disclosures are better and they'll continue to get better throughout the year um and so i think from a gna perspective we're not expecting anything uh out of the norm yeah the gna was abnormally high this quarter we had a one-time hit of about 1.6 million so i think you're

Probably fair to look long-term around the $1.5 million, which I think is what we've averaged in prior quarters. Okay, perfect. I will turn it back. Thanks, guys.

The next question comes from Sam Damiani with TD Cohen. Please go ahead.

Thanks. Good morning. Just on the same property guidance, I just want to clarify, I think it was Brad's question earlier, just on what is included in there. I think you mentioned Richmond is not included in there, but does it include all of the properties that were in the Q4 same property pool plus the expansions coming online in 2024? And does it also include the Canada Carthage vacancy coming up?

It does not include. So it does not include Richmond. It does not include new expansions coming on board. And Canada Carthage, it would include the impact of Canada Carthage. Okay, great.

And just on the Q4 NOI, was there any unusual items either in the rental revenue side or the operating cost side that impacted Q4 NOI that won't continue into 2024?

Yes. We sold Victoriaville in Q2 of last year. And that had a street-line rent adjustment of just under half a million, I think it was $400,000. And so that discontinued this quarter. So you see that as a bit of a difference between our same property NOI and NOI, or sorry, our FFO and our same property NOI.

Okay, but there's nothing unusual on the operating cost side because the cost seemed to really tick up over the third quarter.

Oh, so we did have – actually, just Kelly's reminding me. We had a seasonal drag on retail. So we had outperformance in our growth in our industrial, and then our legacy retail and office were slightly behind last quarter on a sequential basis. And the retail was – due to seasonality, effectively snow removal in the business. And on the office side, there was a vacancy in one of our Montreal offices, which did hurt us.

Gotcha. Okay. Final question for me is just on the dispositions, good color in terms of sort of guidance there. Just wondering what the NOI yield is or expected, your range of that NOI yield on that $210 million.

That's a good question. Overall, probably, let me just think this through for a minute. Without having the numbers right in front of me, I'd probably say in and around eight, probably combined somewhere around there. Great.

That's helpful. Thank you so much. I'll turn it back.

Okay.

No problem.

Once again, if you have a question, please press star, then one. The next question comes from Matt Kornack with National Bank Financial. Please go ahead.

Hey, guys. Just following up on Sam's question on the dispositions, would that exclusively go towards, I guess, the development spend that you have currently underway and and deleveraging, or would you kind of initiate some of these other development projects that you've got planned but aren't in process on, or acquire additional assets?

Yeah, no, I think overall we would use the proceeds just to delever. We don't really have anything too big in the hopper from an acquisitions side of things. It may be a spattering here and there, but nothing major. And so we would use those proceeds to de-lever the balance sheet.

Just the timing of them, Matt. The way the timing works is that most of the development spend will happen in the beginning half of this year, and most of the proceeds we expect to happen in the back half. So from a cash flow perspective, that will be used to de-lever.

Okay, so leverage will pick up a little bit in the next couple of quarters and then come back down a few.

It should be roughly around where it is today. But, like, you know, roughly right around the 50% number.

And on the Alberta acquisition post-quarter, just to give you a sense as to, is that a land purchase or is it some sort of storage that just looks high on a per-square-foot basis? I don't know if it's development-oriented or... Yeah, no, no, that's the Canada cartage.

Oh, sorry.

Yeah. I got it. So that's where the development upside is potentially adding 100,000 square feet. Makes sense. And then lastly, on Richmond, I missed the breakdown of what was fully included in the $200 million, but I don't think that would have been in that number. Is it still something, again, once you get up and running, that you consider selling or given your commentary around the trajectory of the leasing? Would that be a 2025 event at the earliest?

I think that's more a 2025 event. Okay. I'm focused on getting it. Yeah.

Yeah. Okay. So good. Thanks.

The next question comes from Samaya Saeed with CIBC. Please go ahead. Thanks.

Good morning. Just firstly on the outlook, which includes you're expecting your payout ratio to come down to low to mid-90s range, just confirming that that is inclusive of the impact of your planned dispositions?

Yeah, we would probably be in the mid-range, including the dispositions, depending on the if we're able to execute on any kind of higher cap rate, high-quality assets. So I would say it would be, including the disputed positions, it's probably in the mid-range.

And just for clarity, that's a full-year guidance, right? It's not each quarter. We're looking to target that or hit that for a full-year basis.

Right, okay. And then next, I want to touch on the disclosure around your industrial mark-to-market. And just if you could remind us, what do you include in the other bucket for industrial? Just thought there was kind of a big jump in the mark-to-market for those assets from last quarter.

Yeah, so in the mark-to-market, I believe, what did we have in the NDA? The mark-to-market. Oh. That's what she's asking. I believe it's 24% is the mark-to-market on the industrial.

Okay, so it's not 29%?

No, I believe there is an error. So the total company is 24%, not 29%. And then the industrial, yeah, so total company is 24. Okay, great.

Okay, that's all from me. Thank you.

The next question comes from Sam Damiani with TD Coin. Please go ahead.

Thank you. My question was asked. Thank you very much.

The next question comes from Anantan Vijaykumar with RBC Capital Markets. Please go ahead.

Hey, good morning, everyone. Just a quick one here. So I'm just trying to understand these interest rate swaps and the swaptions. Do you have, like, an effective interest rate that you expect in 2024 when these net out?

It's around 4.5%. The... I mean, it's listed there in the MDNA. Basically, they range between four and four and a half is what the swaption exercise price is at.

And would those swaptions net out on the interest rate swaps you had at the table above?

Exactly. Yeah, that's exactly it. It's a one-time option for our counterparty to cancel those swaps. Got it. Okay. Thank you.

Turning back.

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

Thanks, everybody, for attending, and I look forward to chatting next quarter.

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