Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the NEXUS Industrial Rate Second Quarter 2024 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 one on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing start then zero. I would now like to turn the conference over to Kylie Hanzik, Chief Executive Officer. Please go ahead.

Thank you. I'm super excited to welcome everyone to the 2024 Second Quarter Results Conference Call for Nexus Industrial REIT. Joining me today 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 securities filings, which can be found on our website and at cedar.com, for cautions regarding forward-looking information and for information about non-GAAP measures. For the last 24 months, we've been investing to improve our business. Our goal has been to high-grade and optimize our portfolio and to align it with our strategy to be the only Canadian-focused industrial REIT. We have been investing through acquisitions, through four development projects. We have diligently executed on this strategy. And I'm thrilled to share that we are starting to see the results. On last quarter's call, I mentioned that we were nearing an inflection point. and that we are on the cusp of beginning to realize the benefits from our investments. Our results improved materially this quarter, and it is now clear that we have passed this inflection point and have a long runway of growth ahead of us. In the second quarter, our FFO improved 9.2% to $0.178 per unit, and our AFFO improved 10.4% to $0.148 per unit. In both cases, the increase was driven by stronger net operating income with $31.6 million, which was up 7% compared to last quarter and was up 14% or $3.9 million compared to a year ago. The NOI increase was largely driven by three factors, acquisitions, organic growth, and development. I will discuss each of these in more detail. So new properties acquired over the past year contributed $3.9 million to NOI in the quarter. Within the quarter, we acquired one new building, 135,000 square foot industrial property in Kelowna, BC for 35 million at a cap rate of around 7.1. The building is fully tenanted and contributed 300K of NOI in the quarter. Our industrial same property net income, operating income was 23.7 million in the quarter and 800,000 increased from a year ago. The increase was driven primarily by the lease up of our Richmond, BC property, Overall, I'm pleased with our same property NOI growth, given the fact that we faced key vacancies in Q2 that carried over from Q1. The good news is that we've now resolved the vacancies. At our Exeter Road facility in London, Ontario, a new tenant, one of our existing tenants, has taken possession in July, taking all 68,000 square feet of vacant space. It's always good to see existing tenants grow. And at our 102 Avenue facility, southeast Calgary location, a new tenant took the full 29,000 square foot building effective August 1st. The new tenant in southeast Calgary did not lease the adjoining vacant land. It's about six acres. Instead of leasing it, we will construct 115,000 square foot small bay industrial building on the land, which will be completed mid-2025 for about $15 million at an expected yield of 12%. Small Bay Industrial is in high demand in this node of Calgary. I'm also happy to share that we received the building permits, including the lease up of our Richmond, B.C. facility this quarter. It has been a long and sometimes challenging journey, so I'm thrilled to have the property cash flowing. During the quarter, the Richmond property contributed NOI of 900K. Our Titan Park development in Regina, Saskatchewan, was the first of our recent development projects to be completed. We finished it on schedule and within budget. And the primary tenant took occupancy of 200,000 square feet April 1st. The property contributed a healthy 500,000 of NOI this quarter. We've also found a tenant for the remaining 112,000 square feet. We're just in the final throes of having the lease signed, which is any day. They will take occupancy, scheduled to take occupancy on February 1st, 2025. Once this is fully leased, the property will add annual stabilized NOI of about $3.6 million, representing a 7.5% cap rate on our investment of $48 million. I think they're still continued upside there as we have another five acres of land that could be utilized for parking and may bring additional revenue down the line. Turning to our other development projects, in Q3 we will benefit from the completion of our Hubie Road industrial intensification project in London. We completed this 96,000 square foot building addition in July, and the tenant took occupancy in the third week of July. The project will contribute a going-in yield of over 8% in the first year on development costs of $14 million, and the project has significant rent escalations thereafter. It also builds on our leadership position in the highly desirable London market, which continues to be one of the tightest industrial markets in Canada. We're also making great progress on our Glover Road new build in Hamilton near the airport. At the quarter end, we were tracking ahead of schedule and budget, and we completed construction. It is a 115,000-square-foot building with industry-leading 40-foot clear height LEED certification. We own 80% of the property and expect to earn a 5.9% going-in yield on our $25 million share of the development costs. We're currently looking for a tenant, and I'm optimistic that'll be soon leased. Construction's ongoing at our Dennis Road property in St. Thomas, Ontario, for the expansion of our existing tenant, Element 5, a producer of mass timber. This project is a 325,000-square-foot addition at an estimated cost of $46 million. The tenant pays us 7.8% interest on the development costs that we incur during the construction phase, so there's no financial drag on our cash flow. Once it's completed, which we now expect will be in February 2025, the tenant will pay us a contractual rent equal to 9% yield on all development costs. After the quarter end, we opportunistically acquired a brand new single tenant industrial property, which was a brand new build to suit for one of our existing tenants in the portfolio that is easily divisible into two units, if necessary, down the line. The purchase price was $16.6 million, including 4.6 million of class BLP REIT units issued at $10 per unit, which was a 45% premium to our trading price on that day. Not an easy sell. The 62,000-square-foot building is located in Sherbrooke, Quebec, and will yield 6%, going in 6%. On a full-year basis, I expect that the actions we've taken and the positive benefit of embedded rent escalation will drive mid-single-digit same-property NMI growth in our industrial portfolio. Looking beyond 2024, I continue to expect to earn a healthy rent lift on renewals due to industrial market rents that are, on average, 25% above in-place rents and from rent escalation embedded into our lease contracts. We have high-graded our portfolio through acquisitions and organic development, Our priority focus now is selling some of our legacy retail and office assets and the non-core industrial properties which do not fit our strategy. Selling these assets has two significant benefits. It increases the weighting of our industrial portfolio and it delevers our balance sheet. During the second quarter, we made significant progress on this goal. We closed on the sale of one of our office buildings located in Quebec. That is carrying value of $5.1 million, and we contracted for the disposition of 28 other non-core properties for a total of $107 million, which I'm sure we'll get to into the Q&A. In the short term, we no longer expect to sell our portfolio Western Canada truck terminals. We therefore are now targeting non-core asset sales of approximately $110 million in the second half of 2024. We will use the proceeds from the sales to reduce our debt. In summary, we continue to advance our strategy of Canada's pure play industrial REIT. This quarter demonstrated that we have passed the pivot point and expect our results will continue to improve from here. We have resolved the key vacancies. Our creative developments are coming online. We'll continue to realize significant organic growth through embedded steps and positive mark-to-market on renewal. In the coming months, we will also further focus our portfolio and de-lever our balance sheet through strategic dispositions. I'm going to pass the call over to Mike to go over and give you some more color on the financials.

Thank you, Kelly, and good morning, everyone. Starting with the headline earnings in the quarter, net income was $43.5 million, a $33.7 million decrease compared to a net income of $77.2 million last year. The decrease was due to non-cash fair value adjustment gains on investment properties of $13.6 million in the quarter, compared to gains of $33 million last year. In addition, we experienced a non-cash unrealized mark-to-market loss on our interest rate hedges of $3 million compared to a gain of $6.4 million a year ago. We also had a $21.1 million non-cash fair value adjustment on our Class B units compared to a gain of $25 million in 2023. As Kelly mentioned, our Q2 net operating income increased 14% or $3.9 million year over year to $31.6 million. Of this amount, new acquisitions accounted for $3.9 million and an increase in same property NOI added an additional $800,000. This growth was partially offset by a $400,000 relating to asset dispositions made since the first quarter of 2023. and a reduction in the same property NOI by 400,000 from land pre-classified to property under development in the quarter. Normalized AFFO for the period was 14.8 cents per unit, a decline of 1.7 cents from a year ago, as the benefit from higher net operating income was more than offset by a combination of higher interest expense and more units outstanding. Total general and administrative expenses for the quarter was $1.8 million, which was $200,000 higher than a year ago due to higher legal and professional fees. Net interest expense for the quarter was $13.8 million, a $3.6 million increase from the same period last year. The increase was primarily due to a higher outstanding average debt balance resulting from borrowings to fund acquisitions and development expenditures. At June 30th, our NAV per unit was $13.20, an 11 cent per unit increase from last quarter. Our weighted average cap rate decreased by four basis points to 5.8% in the quarter compared to 5.84% at March 31st, 2024. The fair value of our investment properties increased by $82.5 million in the quarter, primarily due to the acquisition of a new property in Kelowna for $35 million, development spend of $18 million, and positive fair value adjustments of $27 million. I'll now turn the call back to Kelly.