Nexus Industrial REIT

Thank you for standing by. This is the conference operator. Welcome to the NEXUS Industrial REIT third 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 star then zero. I would now like to turn the conference over to Kelly Homswick, Chief Executive Officer. Please go ahead.

Thank you very much. Joining me today is Mike Gall, 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. Through 2023 and the first half of 2024, we invested to improve our business. Our goal was to high-grade and optimize our portfolio, taking advantage of uncertain economic backdrop and a weaker real estate market to acquire and develop high-quality assets at attractive prices. We made 10 targeted acquisitions and we advanced four development projects, three of which are already cash-flowing. In the third quarter, we enter the next phase of our plan. We are deleveraging our balance sheet and focusing our business further on the industrial sectors through the sale of our legacy office and retail portfolios, and some non-core industrial buildings, and this quarter we made great headway. In September and October, we announced the sale of our portfolio of eight old Montreal office properties, as well as an opportunistic sale of excess land in Fort St. John, B.C. Now I'm excited to share that all of our legacy retail portfolio, except for one building, is now under a firm sale contract, which is scheduled to close by the end of the year. In addition, we have a firm sale contract for four non-core industrial buildings in Regina, Saskatchewan, which will close in December. We also made progress on the remaining office buildings. We now have two more under firm sales contracts that are scheduled to close before the end of the year, and an additional one under a PSA and in due diligence. This leaves us with one remaining retail building and two office buildings. The retail building, Les Halles d'Anjou, has surplus land, which we are selling separately from the building. Once the land is sold, we will then move to sell the building in the new year. Of the remaining office buildings, as mentioned, one office is under a sale contract, which is not yet firm, and the final two are joint ventures, and we are not currently marketing them. All told, we are targeting non-core asset sales of approximately $110 million in the second half of 2024, and I'm confident that we'll achieve the goal. We'll use the proceeds from the sales to reduce our debt balance. After completing these sales, our mission to be Canada's pure play industrial will be complete, and our industrial NOI concentration will be nearly 100%. Turning to operating performance, we had a strong third quarter. Our normalized FFO improved 5.6% to 18.8 cents per unit, and our normalized AFFO improved 6.8% to 15.8 cents per unit. In both cases, the increase was driven by stronger net operating income, which was up 3% or $1 million compared to last quarter and was up 11% or $3.2 million compared to a year ago. This NOI increase was largely driven by three factors, acquisitions, organic growth, and development. I'll discuss each of these more in detail. Newer properties that we acquired in the past year contributed $2.7 million in NOI for the quarter. Within the quarter, we acquired a brand-new single-tenant industrial property in Sherbrooke, Quebec, that was a build-to-suit for an existing tenant. The purchase price was $16.6 million at a fixed cap. As part of the consideration, we issued the vendor $4.6 million of Class B LP REIT units at $10 per unit, a 45% premium to our trading price on that day. The 62,000-square-foot building is fully tenanted, brand-new, and contributed $200,000 of NOI in the quarter. Our industrial same property net operating income was $26.3 million in the quarter, a $1.4 million increase from a year ago. The increase was driven primarily by the lease up of our Richmond, BC property. This quarter our results benefited from the resolution of two key vacancies that impacted the first and second quarter. On August 1st, a new tenant took the full 29,000 square feet at our 102 Avenue Southeast Calgary building, and at our Exeter Road facility in London, Ontario, a new tenant moved in mid-August, taking all 68,000 square feet of vacant space. Our Titan Park development in Saskatchewan was the first of our recent development projects to be completed. We finished it on schedule and slightly below budget, and the primary tenant took occupancy of 204,000 square feet April 1st. The property contributed a healthy 500,000 of NOI this quarter. We have also inked the tenant for the remaining 109,000 square feet, which takes occupancy in February 2025. Once fully leased, this property will add annual stabilized NOI of approximately $3.8 million, representing a 7.9% cap rate on our investment of $48 million. We still have six acres of land at that site that we are possibly looking to finish and lease as truck parking in the future. This quarter, we also benefited from our Hubrie Road industrial intensification project in London, Ontario. We completed this 96,000 square foot building in July, and the tenant took occupancy mid-month. The project will yield 8.4% 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 also completed our 115,000 square foot Glover Road new build in Hamilton by the airport. We own 80% of the property and will earn 5.9% going in yield on our $25 million share of the development costs. We're currently looking for a tenant I'm optimistic that will be leased in the first half of 2025. Construction is ongoing at our Dennis Road property in St. Thomas, Ontario. This project is a 325,000 square foot expansion for an existing tenant at an estimated cost of $49 million. The tenant pays a 7.0% interest on the development costs that we incur during the construction phase, so there's no drag on our cash flow. When it is completed in the first quarter of 2025, the tenant will pay us rent equal to 9% yield on all the development costs. We have also just started construction of 115,000 square foot small bay industrial building on vacant land that we hold at 102 Avenue in southeast Calgary. The total project cost is about $15 million, and we expect it to be completed mid-2025 and to deliver a 12% unlevered return. Leasing signs are up, and the response has been excellent for this highly desirable small bay design. On a full year basis, I expect that the actions we have taken in the positive benefit of embedded rent escalation will drive mid-single-digit same-property NOI growth in our industrial property portfolio. Looking beyond 2024, I continue to expect to earn a healthy rent lift on renewals due to the industrial market rents that are, on average, 26% above in-place rents, and from rent escalation embedded into our lease contracts. In summary, I expect our results will continue to improve from here. We have firm sales contracts for our legacy office, retail, and non-core industrial portfolios, which will further focus our portfolio and de-lever our balance sheet. We have also resolved key vacancies. Our creative developments are coming online, and we will continue to realize significant organic growth through embedded rent steps and positive mark-to-market on renewals. We have built a strong team, and by the end of the year, our mission to be the Canadian-focused pure play industrially will be complete, and we will set ourselves up nicely for future growth. I'll now turn the call over to Mike to give some more color on our financials.

Thank you, Kelly, and good morning, everyone. Starting with headline earnings in the quarter, net loss was $46.0 million. a $122.9 million decrease compared to a net income of $77.0 million last year. The decrease was due to non-cash fair value adjustments on Class B LP units on investment properties and on derivative financial instruments that combined were $121.1 million lower than last year. This was partially offset by higher net operating income in the quarter. Our third quarter net operating income was $32.6 million, an increase of 11%, or $3.2 million compared to last year. Of this amount, new acquisitions accounted for $2.7 million and growth in same property NOI added $1.2 million. Normalized AFFO for the period was 15.8 cents per unit, a decrease of one cent per unit from a year ago, as the benefit from higher net operating income was offset by a combination of higher interest expense and more units outstanding. Total general and administrative expenses for the quarter were $1.9 million, which was half a million dollars higher than a year ago, predominantly due to higher employee costs and legal fees. Net interest expense in the quarter was $14.0 million, a $3 million increase from the same period last year. The increase was primarily due to a higher average outstanding debt balance resulting from borrowings to fund acquisitions and construction at our Titan Park, Hubrie, Glover, and Dennis Road projects. At September 30th, 2024, our NAV per unit was $13.06, a 14 cent per unit decrease from last quarter. Our weighted average cap rate increased by one basis point to 5.81% in the quarter, compared to 5.80% at June 30, 2024. The carrying value of our investment properties increased by $41.1 million in the quarter, primarily due to the acquisition of an industrial property in Sherbrooke, Quebec, for $16.6 million, development spend of $15.4 million, and $11.1 million of positive fair value adjustments. I'll now turn the call back to Kelly.